ECB says ditching austerity would not help euro zone

Wed Apr 24, 2013 2:28pm EDT
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By Martin Santa and Sakari Suoninen

BRUSSELS/FRANKFURT (Reuters) - ECB policymakers rebuffed suggestions that Europe should ease up on austerity and said that while the central bank has room to cut interest rates, such a move would not necessarily help the economy much.

European Central Bank Vice-President Vitor Constancio said that seeking to stimulate economies by stopping measures aimed at cutting government debt could merely increase countries' borrowing costs rather than triggering growth.

Finance leaders of the G20 economies last Friday edged away from a long-running drive toward cutting spending and raising taxes in rich nations, rejecting the idea of setting hard targets for reducing national debt in a sign of concern about a sluggish global recovery.

With budget cuts blamed for a second straight year of recession in the euro zone, the EU's top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed.

His boss, European Commission President Jose Manuel Barroso, said on Monday that austerity had reached its natural limits of popular support.

Recent surveys and data have pointed to economic weakness spreading to the euro zone core, and on Wednesday Germany's Ifo sentiment indicator came in weaker than the most pessimistic of forecasts as poor exports undermined Europe's largest economy.

"We certainly still have some margin of maneuver to take decisions, and as (ECB) President Draghi said in the latest press conference, we stand ready to act if economic conditions continue to provide bad news, as has unfortunately been the case," Constancio told the European Parliament in response to a question.

But ECB policymakers did not accept that weaker growth was a reason to change course on reform, insisting that more balanced budgets were essential to revive sustainable growth.   Continued...

The Euro sculpture is pictured in front of the headquarters of the European Central Bank (ECB) in Frankfurt, January 17, 2012. REUTERS/Kai Pfaffenbach