ECB's Draghi: Strong euro is risk for recovery

July 14, 2014

London (July 15 )   European Central Bank  President  Mario Draghi  is likely to face a barrage of questions Monday from lawmakers asking what can be done to reduce the value of the euro, as new signs emerged that the recovery for the 18-nation eurozone is faltering.

The euro's strength is hurting European exporters and keeping a lid on the region's recovery from recession, as everyone from German carmakers to Greek yoghurt producers are finding it more difficult to sell their wares.

At around  $1.36  , the euro is down from its 2014 high of just below the  $1.40  mark in May but remains well above its historic average.

Official figures on Monday suggested the eurozone's recovery is flagging, with industrial production down a monthly rate of 1.1 percent in May. That took the annual rate of decline to 0.5 percent and stoked fears that industry will fare worse in the second quarter of the year than the first, thereby dampening growth. During the first quarter of 2014, the eurozone grew by a paltry 0.2 percent.

"Although the decline is likely to have been temporary, the disappointing numbers add to evidence that economic growth in the region is slowing," said  Chris Williamson  , chief economist at  Markit  .

With the economy barely growing and not creating many jobs, politicians are piling pressure on the central bank. If needed, the ECB could further loosen its monetary policy through interest rate cuts or launch a monetary stimulus similar to those undertaken by the U.S. Federal Reserve and the Bank of  England  . Those programs involve injecting new money into the economy by buying large amounts of bonds and other financial assets.

Few economists think Draghi and the ECB want to go down that route, partly because of technical problems such as how to buy assets — and which ones — across a currency bloc comprising 18 countries. However, Draghi has said such a program, called quantitative easing or QE, is within the bank's mandate and could be used if needed.

The  International Monetary Fund  on Monday added to the debate, saying the ECB should undertake a "substantial balance sheet expansion, including through asset purchases" if inflation fails to pick up.

The IMF suggested in its regular report on the eurozone economy that the ECB should buy its member states' government debt to "reduce government bond yields, induce higher equity and corporate bond values, and ultimately raise demand and inflation expectations across the euro area."

For now, Draghi is expected to resist the pressure.

"For the time being, it seems likely that Draghi will stick with attempting to talk the euro lower," said  Jane Foley  , senior currency strategist at  Rabobank International  .

The calls on Draghi to do more may become more acute in the coming months if growth remains anemic and inflation, at 0.5 percent, stays below the ECB's target of just below 2 percent.

The ECB has not sat on the sidelines in recent months. It is currently reviewing the finances of  Europe's  largest financial groups and given them cheap loans to help get credit to businesses. It has also reduced its benchmark interest rate to a record low of 0.15 percent and set a negative rate for the deposits that banks keep at the central bank in the hope that pushes them to lend more.

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