As expected, the European Central Bank announced on Thursday that it will lower the interest rate on both the marginal lending facility and main refinancing operations within the Eurosystem. Effective May 8, the rate on the marginal lending facility will be decreased by 50 basis points to 1.0 percent, and the rate on main refinancing operations will be decreased by 25 basis points to 0.50 percent. The interest rate on the deposit facility will remain unchanged at 0.0 percent.
The decision to lower key interest rates punctuates a series of underwhelming economic indicators released over the past few months that paint a picture of a worsening European downturn. On Wednesday, Europeans demonstrated their unhappiness with the region’s progress and the harsh austerity measures that have — in the eyes of many — done more harm than good. Peaceful protests were held across the region, particularly in economically hard-hit countries like Spain, Italy, and Greece.
Europeans have faced at least three years of severe debt crisis and five consecutive quarters of shrinking economic growth through the end of 2012. Unemployment in the region has increased slowly but steadily to a recent high of 12 percent, and austerity has played a significant role in that contraction.
Critics of austerity champion a program that focuses on growth, and growth means spending. The thinking — currently being debated at the top levels of government, academia, and finance — is that the short-term damage caused by austerity would linger painfully in mid- and long-term recovery efforts. Spending, on the other hand, can be accommodated more comfortably, even at debt loads near or above 100 percent of gross domestic product.
Data released on Monday add to a growing body of evidence that suggest that the euro zone may be further from a recovery than some had expected. The Economic Sentiment Indicator, compiled by the European Commission, decreased by 1.5 points in the EA17, and decreased by 1.8 points in the EU27, trending well below the long-term average.
Perhaps most troubling is that economic sentiment worsened significantly in major economies such as Germany (-2.3 points), France (-2.0 points), and Italy (-1.9 points). Overall, the index dropped to 88.6, which compares against the long-term average set to 100. The decline was more than expected, with economists polled by Bloomberg forecasting a decline to 89.3.
The final euro zone manufacturing PMI reading for April, compiled by Markit, came in at 46.7, a fourth-month low that is slightly lower than March’s reading of 46.8. This indicates that overall manufacturing business activity not only remains in contraction, but that it is trending downward. Markit reported that all of the national PMI indices signaled contraction in April, with concerning rates of decline in Germany, Ireland, and Austria. German output fell to 48.2, a two-month low and its first contraction in 2013.