ORIGINAL FRENCH ARTICLE: Baisse spectaculaire des taux d’intérêt de la BCE
by Bruno Odent
Translated Wednesday 10 December 2008, by
The European Central Bank has decided to reduce its prime lending rate by three-quarters of a point. This is a reduction of unprecedented size.
The European Central Bank (BCE) decided, yesterday (4 December) on a spectacular new reduction in its interest rates. It reduced them by three-quarters of a point in a single move of record size. Never, since the beginning of its existence, had the BCE made a move of this size. Its prime lending rate thus dropped from 3.25% to 2.5%. The decision reveals, in its way, the gravity of the recession that has begun to hit the countries of the euro zone. This big reduction in the cost of borrowing money at the point where banks are supplied by the currency issuing office, is actually intended as a whip to urge on a commercial activity already significantly depressed. Jean-Claude Trichet, president of the BCE, also underlined when explaining this action by his institution, yesterday afternoon in Brussels, that he expected a negative economic growth for 2009 in the euro zone.
An official institute of the European Union, Eurostat, confirmed at the same moment, that the euro zone had already entered into recession in the third quarter, registering a -0.2% growth, as in the preceding quarter. In terms of the whole year, the growth rate reached +0.6% by the third quarter of 2008. This was a net slowing-down, compared with +1.4 at the end of the second quarter, +2.1% at the end of the first quarter. And this noticeable diminution is but the prelude to a contraction that will be much more severe in the economy of the euro zone. "One can bet that the fourth quarter" will be worse, taking into consideration that "the consequences of the financial crisis will begin to have real consequences in the real economy., emphasized one of the Eurostat researchers. End Jean-Claude Trichet himself had to concede that the danger level is "exceptionally high."
Outside the euro zone, other central banks organized, yesterday, downward movements in interest rates that were equally spectacular. The Bank of England thus opted for a reduction of one point in its prime lending rate, to 2%, bringing it to a level unheard of since ... 1951. As for the Swedish Central Bank, it outdid all its brother institutions by passing to a 1.75% reduction in its prime rate, which will now stand at 2%.
It is clear that a sharp decrease in the price of borrowing is more indispensable than ever. The problem is that in today’s conditions, any reduction in credit is first of all confiscated by the financial markets, which have as their priority to use cheap money to regain financial health. So we note in passage how the earlier reductions in interest rates of the BCE have done nothing to benefit the small- and moderate-sized businesses, or individuals, for whom the requirements for bank loans have, on the contrary, continued to stiffen.
In order to be effective, it will be necessary to assure that the indispensible decrease in interest rates can not be confiscated by the big managers of the financial markets, who are today at the top of the economic food chain. We will have to short-circuit that process in order correctly to irrigate economic activity. Thus we see to what extent a new selectivity in credit that permits the according of low interest rates, even with bonuses, to investments rich in jobs, research and training, and penalizes, on the contrary, strictly financial operations, has now become the primary consideration.
Otherwise, for certain, it is wage-earners and citizens who will be presented the bill for these measures of patch up financial profitability, either through plans for restructuring with vast cartloads of firings, or by forced precarity (in the name of return to competitive advantage). In his fashion, the president of the BCE said nothing other than this, yesterday, when he invoked the necessity to not drop our guard concerning "respect for the pact of stability." Which amounts to asking the nations of the euro zone to restrain their outlay in wages and public services. This, at the worst of all possible moments.