Brussels, 08/11/2007
The argument the ETUC puts to the ECB in support of an interest rate cut is based on the common but crucial understanding that monetary policy must be forward-looking. If the ECB does not put itself at the front of the economic curve, it risks entrenching negative growth expectations and repeating the dismal growth performance of the first half of this decade.
The ETUC analysis backs this up and argues that, despite robust growth during 2006, underlying growth dynamics are already weakening and are not strong enough to withstand the triple shock to aggregate demand that is in the pipeline for the coming quarters:
- The impact of more recent hikes in ECB interest rates
- The structural trend of euro appreciation against the dollar, leading to unfavourable conditions for external demand
- The fall-out from the sub-prime crisis and the coming tightening of credit conditions.
The ETUC fears the slowdown could be more pronounced than expected, bringing down euro area growth rates well below 2%. This outcome can and should be avoided by the ECB cutting interest rates right now.
Says ETUC Deputy General Secretary Reiner Hoffman: “A string can be pulled, but it is much more difficult to push a string. The ECB should ‘pull the string’ while this is still possible and cut interest rates right now. If the ECB waits too long before taking action, it will find itself in the position of no longer being able to do so because rate cuts will make no noticeable difference to aggregate demand.”
- ETUC report
