ECB strikes determined tone ahead of European summit

The European Central Bank surprised everybody at the beginning of March by hinting that it would raise its key interest rate as of April.

The markets were not expecting such a move before the end of the summer.

The ECB’s determination no longer to bear responsibility for safeguarding the eurozone probably explains this haste, which sends two unequivocal messages to European political leaders.

The first is: ‘Do not rely on us any longer to keep the monetary union afloat, as was the case in 2010’.

The second: ‘Agree on an effective mechanism to contain the sovereign debt crisis’.

Although the ECB president made a point of specifying that an interest rate hike in April would not necessarily mark the beginning of a cycle of rate increases, one is nevertheless entitled to think that further hikes will take place in the coming months.

One has to be wary of drawing hasty conclusions from this about the level of growth in Europe. Real interest rates will remain negative in 2011 even after three 25-basis point increases in the refinancing rate.

In any case, the European leaders appear to have got the message and buckled down to building a consensus on the future mechanism for managing and resolving the eurozone’s sovereign debt problems.

Although the details of the plan are unlikely to be announced until the end of the European summit on Friday, certain principles have already been accepted, including the extension of the size of the European Financial Stability Fund and of its role, but also the easing of the lending terms granted to Greece.

Although the mechanism put in place does not resolve the cause of the problem – namely the unsustainable debt of the Greek and Irish states – it appears to afford sufficient protection to contain the contagion and prevent the crisis from spreading to Spain or Italy.

Therefore, the month of March, which was looking extremely hazardous for the eurozone, might see a happy ending at the European summit.


Fabrizio Quirighetti is chief economist at SYZ Asset Management. It is the institutional asset management division of Swiss banking group SYZ & CO. SYZ has an established track record in a broad range of asset classes both conventional and alternative. SYZ Asset Management manages €5bn in institutional portfolios, and a further €4.6bn in investment funds managed for the group. The SYZ & CO group manages €19.5 bn.

David Walker

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