Euro recession deepens: So what can the ECB do now?

Speaking in Bratislava, Slovakia, ECB President Mario Draghi said the central bank is "ready to act if needed."

Story highlights

  • Speaking in Bratislava, Slovakia, ECB President Mario Draghi said the central bank is "ready to act if needed."
  • Rahman said ECB may be reluctant to announce new support measures because it breeds political inertia
  • Greece, Spain are both suffering with unemployment above 27% while Italy struggling with high government debt

Backed into a corner and desperate; That's the view of some economists watching the European Central Bank's latest attempts to curtail the euro bloc's recession.

Thursday's interest rate cut, designed to combat a three-year debt crisis, will not stimulate economic growth in the bloc, they say.

Less than a year after the ECB President Mario Draghi buoyed the markets with his promise to do "whatever it takes" to keep the currency together, the central bank's governors move has left some economists questioning whether the ECB has reached the limits of its power.

Speaking in Bratislava, Slovakia, ECB President Mario Draghi said the central bank is "ready to act if needed." But the Italian shied away from announcing any extraordinary policy measures such as another "big bazooka" to increase bank liquidity or the unlimited purchases of government debt -- known as OMTs -- for troubled eurozone nations that sparked controversy in September.

Read more: The eurozone's reluctant leader

Joerg Rocholl, president of the European School of Management and Technology, told CNN that the rate cut is "a desperate move," and means the ECB can avoid criticism that it is "overstretching its mandate."

Despite the ECB's commitment to bankroll ailing eurozone nations who request a full sovereign bailout by buying up government bonds, it has so far resisted the temptation to implement aggressive monetary stimulus.

That intransigence puts it at odds with many of its peers around the world.

The Bank of Japan, the Federal Reserve and the Bank of England have all embarked on a process of quantitative easing -- increasing the supply of money in the economy -- while also introducing other policies such as an unemployment benchmark and a funding for lending scheme, intended to encourage banks to loan to small businesses.

Read more: Will `Abenomics' lift Japan from recession?

Mujtaba Rahman, head of research firm Eurasia Group's Europe practice, said Draghi "exhausted" his political capital when he introduced the OMT program in September. Italian and Spanish bonds, which had been been weighed down by market uncertainty, rebounded.

Rahman added the ECB may be reluctant to announce new support measures because it breeds inertia among politicians looking to push through changes, such as a banking union, needed to bring Europe closer together.

He said: "The wind has gone out of the sails on banking union. Once you announce intervention, you remove the incentive for countries to put the necessary structures in place."

He told CNN that "shovelling money" to small businesses in peripheral Europe is the most likely next step for the ECB, but says the German elections and legality of the ECB's current bond-purchasing program are obstacles to any extraordinary policy announcements in future.

With the worst hit countries in Europe in a depression and unemployment rising, the ECB could be forced to take more action, in addition to the current measures, to prevent the crisis worsening.

Greece and Spain are both suffering with unemployment above 27% while Italy is drowning in a government debt of almost 2 trillion euros ($2.6 trillion), according to Eurostat -- the European Commission's data service.

Read more: May Day protesters flood streets of Europe

Joerg Kraemer, chief economist at Commerzbank -- Germany's second-largest bank -- would expect the ECB to cut the deposit rate to negative territory before putting in place any other non-standard measures such as a loan scheme for small businesses.

He said that the central bank is "in a corner" and has already exceeded its mandate significantly. Peripheral countries must stop expecting the ECB to come up with solutions to problems that should be solved by governments, he added.

"We are already seeing drastic action," Kraemer told CNN, "the ECB has a very expansionary monetary policy, which I personally think, is too expansionary."

He added: "This immediately puts the reform pressure off the peripheral countries and especially Italy. Without far reaching reforms you don't solve the reasons and the causes for the sovereign debt crisis."

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