European central bank cuts interest rate

Duisenberg stressed that the ECB hopes the size of its cut will "focus the attention" of policy makers and the public on the need for structural changes, referring to Europe’s rigid labor markets that have contributed to high unemployment.

The ECB has been a lightning rod for criticism by politicians, particularly former German Finance Minister Oskar Lafontaine, who charged the bank with dragging its feet on lowering ratesand thereby hurting Europe’s recovery. "The politicians have no excuses anymore if growth does not pick up," said Thomas Mayer, economist with Goldman, Sachs & Co. in Frankfurt. "It’s their failure if they don’t do the necessary structural reforms." Euro zone unemployment stands at 11.1 per cent.

The bank sets monetary policy for Germany, France, Italy and the eight other countries participating in European Monetary Union, which began Jan 1. Thursday’s decision marked the first rate action by the new bank, although it led a coordinated rate cut among its predecessor banks in December. The markets had expected the ECB to lower rates Thursday, but only by half as much. Britain and Switzerland, which aren’t part of European economic and monetary union, also lowered interest rates Thursday.

The moves contributed to a surge in the Dow Jones Industrial Average and in bond prices. European markets were closed when the ECB made its announcement, but stocks of European companies that trade on the New York StockExchange soared on the news.

The European economy is clearly in need of a boost. Last week, the European Commission, the executive body of the European Union, cut its euro-zone growth forecast for 1999 to 2 per cent from the 2.6 per cent estimate made in October. In the fourth quarter, euro-zone gross domestic product was up just 0.2 per cent from the previous quarter, down from 0.7 per cent in the third quarter. Germany and Italy have been leading the poor performance, causing some concern that two of the EMU’s largest countries are on the brink of recession. Together they account for 50 per cent of the euro zone’s GDP.

Although US officials hadn’t any public comment on the European rate cuts, both moves were welcome. US Treasury and Federal Reserve officials have been increasingly concerned by slowing growth in Europe, in light of continued recession in Japan, recessions in Brazil and Argentina and tentative signs of recovery in East Asia. US Treasury Secretary Robert Rubin has repeatedly mentioned thatprivate economic forecasts for growth in Europe have declined to "relatively low levels." His deputy, Lawrence Summers, said this week, "The world economy can’t fly on a sole American engine."