6 February 2009

ECB delays on interest rates despite German industrial slump
The European Central Bank has held interest rates at 2pc, rebuffing calls for drastic action to prevent the onset of a deep slump after Germany and Spain both suffered the worst fall in industrial orders in modern history.

German orders crashed 25pc in December year-on-year, roughly in line with the manufacturing melt-down underway in Japan and Korea. "This is astonishingly weak data from Europe's industrial heartland," said Julian Callow, Europe economist at Barclays Capital.

Spanish orders fell 20pc. Europe's car industry has been the hardest hit sector. There is such a glut of unsold vehicles that they are being left on ships at anchor, clogging up the ports of Northern Europe.

"We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe. The ECB has been very slow to grasp that we are facing a dramatic collapse of the global economy," said Mr Callow.

"Europe thinks it can recover on the US coat-tails as it has done before, but it is very different this time. The whole world faces an extremely toxic downturn affecting all sectors. Spain is imploding. French house prices fell 9.9pc in the fourth quarter of last year, which is the steepest fall since the data series began in 1936."

He added: "The eurozone economy is being 'hollowed out' and the really big threat is rising unemployment. This is going to cause serious social and financial strains, but there is a lack of leadership in Europe."

Jean-Claude Trichet, the ECB's president, signalled a half-point cut at the next meeting in March and opened the door for further "non-standard measures" to boost the bank's balance sheet. This does not yet include the purchase of bonds – a political can of worms in the eurozone, where the ECB is prohibited from "monetising" the debts of member states.

Critics say the ECB is falling far behind the US, Japanese, British and Swiss central banks, which have all slashed rates to near zero. Both the Fed and Bank of Japan have already moved to the next stage of stimulus by purchasing bonds or stocks directly.

"This is negligence. Rates should have been slashed to 1pc," said Dierk Hirschel, chief economist for the German union confederation.

Graham Turner, from GFC Economics, said the ECB was playing with fire by waiting so long. "We've had a monstrous decline in German orders and the ECB just blinked. It confirms fears that we're not going to get quantitative easing from them without a major fight. This is a major risk for euroland because the damage in Spain, Ireland and Eastern Europe is starting to panic people."

The wait-and-see line has led to an open rift within the ECB's governing council. Cypriot governor, Athanasios Orphanides, a former official at the US Federal Reserve, has challenged the ruling orthodoxy of Bundesbank chief Axel Weber that rates cannot be cut much further without running out of ammunition, calling such arguments a "dangerous fallacy". Central banks retain a nuclear arsenal for use against debt deflation.

The economic slump – Deutsche Bank fears a 4pc contraction of German GDP this year – is rapidly turning into a political crisis as countries scramble to protect their core industries and head off spiralling job losses.

French President Nicolas Sarkozy booked a prime-time television slot last night to reassure voters after the biggest protests in 20 years. His planned €6bn (£5.3bn) bail-out for the French car industry has taken a starkly protectionist turn with talk of a "Made-in-France" clause to ensure that recipients of government credits use French sub-contractors.

Neelie Kroes, the EU's competition commissioner, said any such move would be "contrary to EU state aid and single market rules. It would not be in the interest of France, of French car-makers, or of any member state to see a resurgence of protectionism in Europe. Raising barriers within Europe cannot be the way out to this crisis."

Luc Chatel, the industry minister, denied any plans to discriminate against foreign suppliers, but said companies receiving state help must commit to producing in the home market.

"There is no question of the state helping out a car manufacturer which might decide to close plants in France," he said.

Germany, Britain, Sweden and Italy are all preparing bail-outs for their own car industries, mostly designed to ensure that aid stays at home rather leaking out.

The EU's Czech presidency said there was a danger of a "race towards national subsidies". It is drawing up plans for an EU-wide car rescue to be agreed at the March summit of EU leaders, mostly focused on bonuses for buyers who exchange old cars for the latest "green" models.

The return to nation-state reflexes poses a grave risk to smaller countries such as Belgium which host foreign car plants but have no native car industry. The Belgian government is holding crisis talks over the fate of an Opel plant in Antwerp, seen as an orphan factory likely to be sacrificed.

Gunther Verheugen, the EU's industry commissioner, said Europe's car industry is bedevilled by 20pc to 30pc over-capacity. Output has dropped from 12m vehicles in 2007, to 11m last year, and will most likely fall below 10m this year. There are a dozen plants too many, and 400,000 jobs may have to go.

"There is no guarantee that all the producers will still be there by the end of the year," he said.

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