Blast fears could trigger EU interest cut

Fears sparked by the bomb attacks in Madrid could persuade the European Central Bank to cut its key interest rates in order to boost confidence in the region.

    The eurozone economy grew by a meagre 0.4% last year

    Until recently, the ECB was confident the economy would recover, but its officials have adopted a more cautious tone lately, commenting on the persistent weakness of consumption and urging households to spend more.


    "Without a clear recovery in consumption, sustained strong growth will not be possible in the euro area," the bank's chief economist Otmar Issing said in an interview published in the Austrian magazine Profil on Monday.


    "If this doesn't materialise, we'll be confronted with a new situation. And as always, we'll re-analyse it and take the necessary action," Issing said.




    Such remarks seem to open the door to the rate cut repeatedly called for by countries such as Germany and France, but so far ignored by the ECB, which has held its central "refi" refinancing rate steady at two per cent since June 2003.


    "The attacks in Madrid have re-ignited the debate about how the economy will fare if there is a wave of terrorism in Europe. The fears of the terrorist threat alone could choke off the green shoots of recovery," said Helaba analyst Christian Schmidt.


    "Without a clear recovery in consumption, sustained strong growth will not be possible in the euro area"

    Otmar Issing,
    chief economist, ECB

    Household demand and consumer confidence are still very weak and therefore remain the Achilles' heal of the tentative economic recovery which appears to be taking shape in the 12 countries that share the euro.


    And if the bomb attacks in Madrid last week, which killed 200 people and left 1500 injured, do indeed prove to be the work of al-Qaida and mark the first attack of this magnitude by Islamist extremists in Europe, then it could magnify nervousness in countries such as Germany where consumer demand has been waning for the past

    two years.


    "The capital markets are concerned about the vigour and length of the anticipated recovery" and translating that into increased nervousness on the stock markets, Deutsche Bank warned in a recent study.


    The eurozone economy grew by a meagre 0.4% last year.


    And the bloodshed in Madrid and further threats to Europe are combining to contribute to the negative sentiment evidenced in recent disappointing economic data.



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