ECB's predicament leaves peers mute on currency depreciation

Tue Sep 16, 2014 7:27am EDT
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By Eva Taylor, Leika Kihara and Howard Schneider

FRANKFURT/TOKYO/WASHINGTON (Reuters) - Attempts by the European Central Bank to weaken the euro have the potential to spark a currency war but policymakers across the world are keeping silent, knowing the ECB has scant alternatives to keep its economy afloat.

Euro zone central bankers have spelled out the need for a weaker euro to breathe life into the bloc's economy, which flatlined in the second quarter and is flirting with deflation.

Such comments are usually a no-go among the big industrialized nations for fear that one country's bid to become more competitive might trigger a race to devalue currencies and prompt other economies to resort to protectionism.

But ECB measures that have helped push down the euro to below $1.30 from just shy of $1.40 in May have drawn little objection. These include verbal interventions, cutting interest rates close to zero and a pledge to flood the banking system with money via cheap loans and purchases of private sector debt.

"People aren't criticizing the ECB as triggering a currency war, because they are worried the euro zone may slip into deflation," said a Japanese policymaker with direct knowledge of exchange rate policy. "It's in the interests of the global economy for Europeans to do what's needed to avoid deflation."

Japan got a similar pass from its G20 peers last year when Prime Minister Shinzo Abe launched an aggressive mix of monetary and fiscal stimulus that pushed the yen sharply lower.

Having urged Tokyo for years to do something to galvanize its listless economy, other major economic powers could hardly complain about such "Abenomics".

The problem for the ECB is that its new funding may not pass through to businesses and households as intended. Many euro zone banks are still laden with bad loans and struggling to meet regulatory demands for more capital buffers, while uncertainty from the conflict in Ukraine and a sanctions war with Russia could spoil companies' appetite for new loans.   Continued...

A structure showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt July 11, 2012. REUTERS/Alex Domanski