Bank president Mario Draghi says end of deficit cuts is not on agenda and pleads for eurozone 'perseverance'
Giles Tremlett in Madrid
The bosses of the European Central Bank travelled to the eurozone's troubled south on Thursday, only for Spaniards to discover that they offered nothing new in the way of help for the country's recession-hit economy.
As thousands of extra police were drafted in to keep protesters away, the ECB board met in Barcelona but failed to produce the kind of stimulus measures that are increasingly demanded by commentators in the eurozone's south.
The ECB president, Mario Draghi, instead praised austerity measures in Spain, a country that has fallen into recession as the government obeys eurozone orders to slash its deficit by some ¤60bn (nearly £50bn) over two years.
"The ECB president's tone was a lot more hawkish than the market expected," said Jeremy Cook, chief economist at World First. "Draghi also pleaded for 'perseverance' from Europe, a not entirely well-veiled reminder that Germany and the Bundesbank will not stand for people shirking their austerity responsibilities."
Unemployment in Spain rose to 24% in the first quarter of this year. Austerity measures are expected to push that figure higher as the economy shrinks both this year and next.
Spanish authorities were so frightened that the presence of the ECB would attract protesters from around troubled southern Europe that they suspended the Schengen treaty and re-established border controls. An extra 2,000 police were drafted into Barcelona as several thousand students marched peacefully though the city to protest against fee rises.
The Frankfurt-based ECB claimed it had held the board meeting at a fortified luxury hotel in Barcelona in order to become "better known to citizens". But Spanish protesters saw the policing as a sign of the heavy hand that the conservative prime minister, Mariano Rajoy, has pledged to use with demonstrations similar to those sparked by the so-called indignados who occupied city squares last year.
Draghi announced the ECB would keep interest rates at a record low of 1% and said it would be premature for it to pursue an exit from the extraordinary measures taken to help stem the eurozone's debt crisis. "There is wide, I would say unanimity about the fact that an exit strategy is premature," he said.
That meant the ECB's programme of purchasing bonds from troubled European countries would remain in place. "The instrument is still there," Draghi said, warning that this was "neither infinite nor eternal".
Over recent days and weeks, the pressure has increased on Europe's policymakers to come up with measures to boost growth. Draghi did repeat the need for a "growth compact" alongside the "fiscal compact" governments agreed earlier this year to keep budgets under tight control, but there was little new in his statement. "We have to put growth back at the centre of the agenda," he told journalists later.
He nevertheless claimed that Europe's economy seemed to be slowly on the mend. "There are indications that global recovery is proceeding," he said. "We continue to expect the euro area economy to recover gradually during the course of the year."
Stocks fell back amid disappointment that Draghi had given no indication that the ECB might offer more long-term, super-cheap loans to banks or that monetary policy would be eased further.
"Barring further weakness in euro area economic data, the ECB appears to be in no hurry to provide further stimulus in the near term," said Benjamin Reitzes, an analyst at BMO Capital Markets.
"There is still a marked reluctance within the ECB to take interest rates below 1.00% and it will probably need sustained weakened eurozone economic news to result in it happening," said Howard Archer, of IHS Global Insight. "Unfortunately that could very well happen."
Spain has pledged to reduce its budget deficit from 8.5% to 3% of GDP over two years as its borrowing costs come under increasing pressure. On Thursday it managed to place ¤2.5bn of long-term bonds, though at a higher interest rate than in previous months.
Lyn Graham-Taylor of Rabobank said the auction showed that the €1tn of cheap loans pumped into European banks earlier this year by the ECB were no longer enough to help weak countries such as Spain. "It is difficult to not see Spanish yields continuing an inexorable rise from here given the poor economic figures and the increasing talk of a bank recapitalisation being required," he said.
A voluntary plan for banks to park toxic real estate assets into special holding companies is due to be passed within weeks, Spanish government sources said on Thursday.
"It will be done on a voluntary basis," economy ministry spokeswoman Esther Barranco told Reuters, adding that the Bank of Spain would co-ordinate the different models developed by the banks.
In a departure from Spain's normally enthusiastic approach to all things European, some leftwing commentators are beginning to suggest the country should consider leaving the euro if there is no greater support from the ECB or Germany. "Leaving the euro would be harsh for our economy. It is not a good solution, but it might be the least painful one," said influential blogger Ignacio Escolar in a recent post.
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