22 March 2001, 11:47 GERMANY DIW: ECB RATE CUT COULD HAVE PREVENTED EMU SLOWDOWN
BERLIN (MktNews) - The European Central Bank (ECB) could have
prevented the current eurozone downturn had it followed the U.S. Fed's
example and lowered interest rates at the first signs of slowing growth,
Gustav Horn, chief economist of the renowned German Economic Research
Institute (DIW), told German radio in an interview broadcast Thursday.
Further, a rate cut by the ECB now would stabilize the eurozone
economy by year-end at the earliest, Horn said.
The ECB has kept its key minimum bid rate at 4.75% since last
October following seven consecutive rate hikes totalling 225 basis
points. ECB Chief Economist Otmar Issing said Wednesday that while the
EMU growth outlook for 2001 recently dimmed, it still remains robust.
Asked if the ECB should have cut interest rates as did the Fed when
the first signs of an economic slowing became apparent, Horn replied:
"That would have been necessary a long time ago. Only then one could
have hoped that the (economic) downturn could have been stopped early
on."
"As it stands now, the economic downturn (in the eurozone) can
not be prevented any more," Horn told Deutschlandradio.
However, if the ECB were to cut interest rates now "it could
stabilize (economic) developments by year end," Horn said.
Horn also said that the recent downturn in Germany was mainly
caused by weak domestic demand, partly due to the moderate wage
settlements in many business sectors. Many German trade unions agreed
moderate two-year wage contracts last year.
The DIW is the most left-leaning of Germany's six leading economic
research institutes. Several institutes, including DIW, recently
revised down their growth forecasts for Germany.
The HWWA cut its 2001 GDP projection to 2.3% from 2.7%. The Kiel
institute cut its forecast to 2.1% from 2.4%, Ifo to 2.4% from 2.5% and
DIW to 2.1% from 2.5%. However, the German government is sticking to its
forecast of +2.75%, though Finance Minister Hans Eichel has stated that
this represents growth at the lower end of a range from 2.675-2.825%.
Weak domestic demand in Germany was responsible for slowing growth
there, Horn said. "That (weak domestic demand) is caused by the poor
business trend and the moderate wage agreements (in Germany)," Horn
said.
However, the landmark German tax reform -- which came into effect
at the start of this year -- would help to prevent a recession in
Germany, Horn said.
"The tax reform will surely have a positive effect and will be a
counterbalance, that is why we do not see a recession this year (in
Germany). However, growth (in Germany) is still disappointing," Horn
remarked.
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