A new note but tone music of unemployment and recession continues

ECB president Mario Draghi took some time out from yesterday's activities in Bratislava to launch newly minted €5 banknotes.

The ceremony, complete with smiling schoolchildren and accompanied by the strains of Beethoven's Ode to Joy , was dubbed as a celebration of the euro. But the reality 12 years after the advent of the currency union is entirely different as the euro zone struggles to escape the bind of recession.

Yesterday the ECB announced the first cut in interest rates in 10 months, bringing the benchmark rate to 0.50 per cent.

'Ready to act'
The move had been expected by analysts. Draghi had signalled last month that the ECB would remain accommodative and stood "ready to act" if needed, but developments over the last few weeks bolstered the case for monetary intervention.

Dire unemployment figures on Tuesday showed that unemployment in the euro zone continued to climb in March, with 26.5 million out of work across Europe, 19.2 million of whom are in the euro area.

Business confidence also fell in April while inflation dropped to 1.2 per cent compared to 1.7 per cent the previous month.

The fall-off in inflation in particular opened the door for an interest rate cut. With the ECB committed to maintaining inflation below, or close to, 2 per cent, an inflation rate of 1.2 per cent permitted the bank to act without being accused of jeopardising price stability.

What impact this interest rate cut will have on the real economy is the central question. While the cut is a welcome boost to holders of tracker mortgages, the ECB has previously pointed to problems in the transmission of the bank's interest rate policies to the real economy, particularly in "peripheral" countries. Similarly, despite the pressure on the ECB to act, a 25 basis point drop is unlikely to make a significant impact in the most indebted peripheral economies such as Spain and Portugal.

Core economies
Crucially, however, Draghi indicated yesterday that concern about the economic situation in the euro zone's "core" economies contributed to the interest rate decision. Weakness in economic activity is not only affecting non-core countries, he said, but also core economies where the issue of "transmission" was never a problem.

Concerns about the growth of some of the euro area’s strongest economies have begun to surface. Countries such as Austria, Germany and the Netherlands still have much lower unemployment rates than some of their southern neighbours, with unemployment standing at 4.7 per cent, 5.4 per cent and 5.7 per cent respectively at the end of March. But the economic slowdown is also proving difficult to escape.

Economic output in Germany slowed in March, according to figures last week, with the country’s closely watched manufacturing index falling sharply to 48.8, a six-month low.

The ECB’s decision not to announce any so-called non-standard measures to stimulate growth, particularly for the SME sector, will disappoint many who believe that the ECB is not interventionist enough.

With the debate about Europe’s fiscal consolidation policies intensifying, the ECB is likely to find itself under increasing scrutiny in the coming months.