Europe's central bank surprise move is a warning that global growth is slowing

The European Central Bank in Frankfurt Main, Germany, on April 27 2017.
The European Central Bank in Frankfurt Main, Germany, on April 27 2017.PHOTO: EPA-EFE

FRANKFURT (NYTIMES) - Just a few months ago, the European Central Bank (ECB) put the brakes on a vast economic stimulus programme devised during the financial crisis. On Thursday (March 8), it unexpectedly reversed course and revived some of the measures, signaling the rising threat of a recession.

The quick turnabout, from confidence to concern, reflects the broader weakness in the global economy. A slowdown in China, exacerbated by rising trade tensions with the US, has reverberated around the world, dragging down growth in Europe and elsewhere.

The US is Europe's largest trading partner, while China is an increasingly important market for its cars, pharmaceuticals and manufactured goods. The industrial powerhouse Germany barely escaped recession in the latest quarter, as the country's economy was battered by the US tariffs on its steel and waning Chinese appetite for its machine tools and Volkswagens.

Europe has been particularly vulnerable to global forces, given the turmoil at home. The uncertainty over Britain's exit from the European Union has put pressure on the British economy, while Italy and Spain have been shaken by their own political fissures.

The struggles abroad have the potential to blow back on the United States, which has been the star performer among global economies. History shows that the US economy cannot escape problems in Europe, given their deep commercial ties. And the Chinese slowdown amplifies the risks.

"We're looking at the potential for a synchronized slowdown of the global economy," said Carl B. Weinberg, chief international economist at High Frequency Economics.

Against that backdrop, the ECB's Governing Council voted unanimously on Thursday to bring back a stimulus measure intended to encourage lending. The move will help banks in countries with weaker economies like Italy that may have trouble raising money on capital markets at reasonable rates.

The stimulus programme was used to prevent collapse of the eurozone following the 2008 financial crisis. It allows commercial banks to borrow money from the central bank at zero interest, but they have to promise to lend the money to businesses or consumers.

Mario Draghi, president of the ECB, implicitly blamed White House policies for the economic damage behind the decision. "Lower confidence produced by the trade discussions" was a key cause of economic slowdowns in Europe, China and emerging markets, Draghi said at a news briefing. He added, though, that he did not expect a recession.

The bank also pushed back the date of its earliest possible increase in benchmark interest rates by at least four months, saying there would be no change until 2020. That means that Draghi will serve his full nine-year term without ever having overseen a rate increase. He leaves office at the end of October.

"The bank is saying, 'We are doing everything we can,'" said Florian Hense, an economist at Berenberg Bank in London.

The past decade had been rough for Europe.

The global financial crisis, which set off the European sovereign debt crisis, forced Draghi to unleash extraordinary stimulus measures to keep the eurozone from being torn apart. Draghi, who famously vowed to "do whatever it takes" to keep the bloc intact, oversaw a vast de facto money printing program in which the bank bought trillions of euros of government and corporate bonds.

Europe seemed to have finally turned a corner last year, and Draghi began cautiously unwinding its program of bond buying, a strategy known as quantitative easing. The bank stopped adding to its bond portfolio in December, and also set the stage for an increase in its key interest rates as early as this September.

Those moves were an expression of confidence that the world's major economies would shrug off President Donald Trump's trade war and continue to grow strongly. But a few months later, the picture looks decidedly worse.

Italy is in recession and Germany came close. Britain's attempt to leave the European Union proved even more difficult and disruptive than expected.

Even the weather seemed to conspire against Europe. An unusually dry and hot summer caused the water level in the Rhine River to drop so low that barge traffic became impossible, disrupting transport of chemicals and fuel, causing shortages and driving up prices.

The timing of the overseas slowdown could not be worse from the United States' perspective. It's happening just as the US economy is expected to slow down after the economic high of the tax cuts that went into effect last year starts to wear off.

In that environment, the United States and its companies will be more dependent on the health of trading partners like Europe. "The US needs the rest of the world a bit more than last year," said Brad W. Setser, a senior fellow at the Council on Foreign Relations.

Economic weakness abroad can also send US stock markets into a tailspin.

In 2011, when investors feared that a wave of European governments and companies might default on their debts, US stocks fell nearly 20 per cent from their highs. In 2015, the S&P 500 plunged after China's central bank made a surprise move that reduced the value of the country's currency against the US dollar.

The sudden announcement by the ECB on Thursday was out of character. Typically, the bank changes policy gradually and gives investors plenty of warning.

The bank also displayed an unusually high level of determination and unity. All of the members of the Governing Council supported the decisions on Thursday, Draghi said. That has not always been the case. During the crisis years the council, which includes central bankers from all 19 countries in the eurozone, was often divided on its response.

Still, the central bank is treading cautiously, waiting to see what happens with the economy. It did not take the more radical step of increasing its purchases of government and corporate bonds. That form of stimulus is associated with extreme stress and might have been taken as a sign of panic.

Draghi said the central bank would do more if the economy took a turn for the worse. "We are very open to act and determined to act when it's needed," he said.

The bank's change of heart reflected the views of its in-house economists, who significantly lowered their forecasts for growth and inflation. They now expect eurozone growth in 2019 to be 1.1 per cent, rather than the 1.7 per cent growth they were forecasting only a few months ago.

The moves provided a short-lived jolt to European stock markets. The major indexes, which had been lower for the day, briefly jumped into positive territory. But any euphoria about the stimulus may have been outweighed by the realization that the central bank is more worried about the economy than investors thought. Stocks slumped in Europe and, later in the day, on Wall Street.

"Today's announcements have some flavor of panic," Carsten Brzeski, chief economist at ING Germany, said in a note to clients.