The European Central Bank won’t be able to unwind its expansive monetary policy without the support of the region’s governments, said Joerg Kraemer, chief economist at Commerzbank AG.
“The ECB can’t exit without the help of finance ministers because that would endanger the monetary union,” he said during a press briefing in Frankfurt today. “We need a breakthrough in reforms in the periphery and a top-up of the rescue fund. Only then could the ECB retreat.”
Financial markets have calmed since ECB President Mario Draghi pledged in July to do whatever it takes to safeguard the euro and later announced an unlimited bond-purchase program for countries committed to reforms. Even inconclusive elections in Italy, which have left the region’s third-largest economy without a government since February, and a bungled bailout in Cyprus haven’t resulted in sustained market turbulence.
“Markets believe in the safety net of the ECB,” Kraemer said. “We’ve received a lot of bad news in recent weeks but markets digested them much better than last year. The sovereign debt crisis is no longer perceived as a global threat.”
While “much speaks for Slovenia asking for help from the European community,” the country “isn’t a second Cyprus,” he said. Slovenia is may become the sixth euro-area country to request international aid as a banking crisis strains the budget, government bonds plunge and default risk soars.
ECB policy makers will “refrain from taking a symbolic step” and keep interest rates at 0.75 percent at the next meeting in May, Kraemer predicted. They “won’t cross the Rubicon” and start buying assets to improve funding conditions for small and medium-sized companies either, he said. “They’d rather expand the collateral framework further.”
Economists have brought forward their forecasts for lower interest rates after Draghi said last week that officials “stand ready to act” to bolster a flagging economy. The median estimate is still for no change in rates through the end of next year, according to a Bloomberg News survey.
“Hard data have disappointed in the first quarter and that has an immediate impact on our annual forecasts,” Kraemer said. “The outlook from the second quarter is broadly unchanged.”
Commerzbank lowered its economic projection for the euro area to a 0.2 percent contraction from growth of 0.3 percent. The German economy, Europe’s largest, is expected to grow 0.5 percent this year, less than the previous forecast of 1 percent, Commerzbank said.