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European Debt Crisis

ECB drops interest rates to 1 %

Stacey Vanek Smith Dec 8, 2011

Stacey Vanek Smith: Today the European Central Bank announced a series of steps it will take to help Europe’s economy. Among them — cutting interest rates down to 1 percent.

Here to help us understand the bank’s actions is Adolfo Laurenti, deputy chief economist at Mesirow financial. He joins us live. Good Morning, Adolfo.

Adolfo Laurenti: Good morning.

Smith: Adolfo, let’s start with the rate cut. How will cutting interest rates help the European economy grow?

Laurenti: Well that’s the major concern. They really need to do something — not just for the economy, but for their banking system. Together with the cut in interest rate, the European Central Bank decided to extend the longer loans to the European banks and to accept a wider variety of collateral.

All of this is made to make sure that there will be no credit crunch, and some support will be provided to the economies that are already slowing. Because of austerity measures, we are seeing a likely recession in Italy; Belgium had a negative GDP reading the other day. So the European Central Bank is really trying to do something hard in order to help these economies.

Smith: It did announce a lot of actions, but the European Central Bank also hinted that it wasn’t going to do anything drastic, like the massive bond-buying program we did here. Is that a mistake?

Laurenti: There is a huge controversy in Europe about the role of the European Central Bank in terms of helping the sovereign debt. That’s the key issue tomorrow, when the meeting will be convened in order to discuss greater fiscal integration.

The understanding is that the preference by the Germans is to keep the European Central Bank out of the sovereign debt situation, but clearly, the economies over there need to be more. The Germans are not really willing to go either in the direction of quantitative easing, as the United States did. So the variable tools to the ECB are not really that many. They are trying hard to do with what they are left.

Smith: Adolfo Laurenti with Mesirow Financial, thank you.

Laurenti: My pleasure, thank you.

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