ECB strikes positive note in contrast to US counterparts

THE EURO zone’s economic recovery was surpassing expectations but it was too early “to declare victory”, the European Central Bank said yesterday, striking a noticeably less gloomy tone than the US Federal Reserve.

Evidence was mounting that the three months to September would see stronger growth than originally forecast, according to Jean-Claude Trichet, ECB president. Uncertainty remained over outlook, but he dropped a previous description of the level of uncertainty as “high”.

In contrast, Ben Bernanke, Federal Reserve chairman, last month noted the outlook was “unusually uncertain” for the US economy and signalled the US central bank would be ready to act if more stimulus was needed.

Mr Trichet’s comments came just hours after Germany reported a stronger than expected 3.2 per cent surge in industrial orders in June, and Greece was praised by EU authorities and the IMF for its progress in implementing its emergency rescue programme.

Signs that the euro zone is over the worst of the crisis have boosted confidence in financial markets. Further steps in the ECB’s “exit strategy” to unwind exceptional measures taken at the height of the crisis will be considered next month.

Mr Trichet remained cautious, however, saying: “I don’t declare victory.” After a “particularly flattering” second quarter, growth would be less dynamic overall in the second half of the year.

The ECB yesterday left its main rate unchanged at 1 per cent for the 15th consecutive month. In recent weeks, euro zone banks have reduced significantly the emergency liquidity demanded from the ECB. Market interest rates have risen as a result, but Mr Trichet said that simply reflected a “normalisation” process.

Nor did the ECB president see higher market borrowing costs and recent rises in the euro as, in effect, a tightening of monetary policy. He saw “exactly the contrary”, with the revival in confidence boosting growth prospects.

The difference in tone between the ECB and Fed reflected the contrasting fortunes of the US and euro zone in recent months in the eyes of financial markets, he said.

“After having been extremely negative on Europe and extremely positive on the US, we are now observing some kind of swing in the other direction.”

But analysts warned the ECB’s relative optimism could prove misplaced. US and euro zone monetary policymakers gather in a few weeks for a summit in the US. “I can’t help wondering if, when euro area policymakers go hiking in Jackson Hole, they may not return a little bit warier,” said Julian Callow, European economist at Barclays Capital.