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December 07, 2011

Europe Central Bank Lowers Rates

by Lisa Bryant

The European Central Bank lowered its benchmark interest rate Thursday to a record 1.0 percent. The move by the bank to help stimulate Europe's economy came as France and Germany urged other European leaders to adopt their eurozone crisis plan at a key summit in Brussels.

Just hours before the start of the European Union summit, French and German leaders were in the southern French city of Marseilles, making a final pitch to overhaul key European treaties.

In an address to fellow European conservatives, French President Nicolas Sarkozy said the 17-nation euro currency union needed more solidarity, more discipline and more governance. The longer European leaders wait to make a decision, he said, the costlier and less efficient it will be.

Mr. Sarkozy and his German counterpart, Angela Merkel, will be making that argument during the two-day summit in Brussels. Analysts say their plan may take years to be implemented - while the eurozone crisis needs immediate solutions. But the pair argues Europe's very foundations must be changed to save the currency union.

Mr. Sarkozy said EU leaders need to re-found and rethink Europe. If not, the same causes will produce the same effects.  

There are already indications that some EU members - notably Britain - are skeptical about their proposals. But in Marseilles, Chancellor Merkel said that France and Germany want all 27 EU states to adopt their plan.

"I'm sure that we need all 17 members of the eurozone, that we demonstrate that we are willing to be open...and that we will be able to move forward if we are all in agreement - i.e., all 27 members of the European Union," Merkel said.

The two leaders do have a "plan B." If all 27 members do not accept their plan, they will push the 17 eurozone members to adopt it.

The eurozone debt crisis and fears of a looming recession prompted the European Central Bank (ECB) to announce Thursday it is cutting its benchmark interest rate by a quarter-percent for the second month in a row. At a press conference in Frankfurt, the ECB's new chief, Mario Draghi, also signaled the bank was expanding emergency funding to cash-strapped banks.

"A number of factors seem to be dampening the growth momentum in the euro area," said Draghi. "They include a moderation in the pace of global demand growth, and unfavorable effects on overall financing conditions and on confidence resulting from ongoing tensions in euro-area sovereign debt markets as well as process of balance-sheet adjustments in financial and non-financial areas."

While Draghi predicted a better economic forecast next year, ratings agency Standard & Poor's dumped more bad news on Europe - warning on Wednesday it might cut the credit rating of the European Union and that of top European banks. It has already warned it might downgrade the ratings of 15 eurozone countries.

In an interview on French radio, Luxembourg Prime Minister Jean-Claude Junker - who also heads the euro group of countries - expressed surprise at the S&P move.

Asked if he was optimistic the EU leaders could reach agreement during their summit, Mr. Junker was blunt. The leaders, he said, have to reach an agreement.