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Italy’s Letta Wants Economic Growth, As Merkel Insists On Strict Austerity…

As Italy’s new prime minister Enrico Letta seems to support the immediate implementation of economic growth policies in the euro zone, Chancellor Merkel in Berlin insists that economic growth and fiscal consolidation can go together. This is at least a financial paradoxical approach to the current euro crisis:

Italy’s Letta wins French backing for focus on growth – Yahoo! News

Italy’s new prime minister Enrico Letta won French backing on Wednesday for calls to spur economic growth alongside budget rigor, but problems lay closer to home with coalition partners demanding tax cuts that would blow a hole in the budget. Letta, who took his message to Berlin on Tuesday, met French President Francois Hollande and said he was “100 percent satisfied” with the meeting and Hollande’s response to his calls for Europe to start focusing on growth as well as consolidation. Hollande said after the meeting: “Europe has to do the maximum it can for growth.” German Chancellor Angela Merkel struck a conciliatory tone in Berlin but gave no sign that she was willing to change her government’s tough approach to the heavily-indebted countries of southern Europe, insisting there was no contradiction between growth and fiscal consolidation.

Enrico Letta 1 Euros

More importantly, the ECM is expected to move forward by cutting interest rates, the first in the last 10 months:

ECB interest rates expected to fall to new low – BBC News

The European Central Bank (ECB) is widely expected to cut interest rates later, as it seeks to boost growth amid ongoing fears for the eurozone economy. A cut would be the first in 10 months, and reduce its key interest rate to a new record low. Currently rates are at 0.75%, but there have been calls for a further cut amid continuing concerns over the economy, and receding inflationary fears. The ECB is due to announce its decision at 13:45 local time (12:45 BST). Official data released on Tuesday showed record high unemployment in the eurozone, and inflation at a three-year low. That has increased the gloom over the eurozone economy, in which many members remain either in recession or suffering from low growth.

On the other hand, problematic euro zone banks are in great need for cash money to survive. This is a very basic need for them, but low interest rates are to offer no help to this direction:

MONEY MARKETS-ECB rate cut may limit money market appeal – Reuters

An ECB rate cut this week would limit moves in the money market in future but may also prevent borderline healthy banks returning to the market and dull its appeal for others. While the European Central Bank is widely expected to cut its main interest rate to a record low 0.5 percent on Thursday, market prices show investors believe it will keep its deposit rate at zero for the foreseeable future. That would soothe the concerns of those who warn a negative deposit rate could wipe out unsecured lending market, but would also narrow the corridor between the main rate and deposit rate in which money market rates move. With so much cheap ECB money in the system and key bank-to-bank lending rates at just 0.2 percent, the change is unlikely to matter until liquidity levels drop and market rates begin to move more freely again. In the last few years, the ultra-easy conditions created by the ECB mean interbank rates hardly budge even during a flare-up in the euro zone crisis. “It is a story for the future really, but what it (a rate cut) does is lower your effective ceiling for market rates,” said Nomura rate strategist Guy Mandy. “In that lower-for-longer environment volatility should be dampened but there are still risks in that Europe is still not a safe place.”

Forex – EUR/USD slightly lower on ECB rate cut hopes – Investing.com

The euro is trading modestly lower against the U.S. dollar during Wednesday’s Asian session as hopes increase that the European Central Bank will lower interest rates following its monetary policy meeting Thursday.  In Asian trading Wednesday, EUR/USD inched down 0.04% to 1.3164. The pair was likely to find support at 1.3053, the session low and resistance at 1.3199, the high of April 17 and a two-month high.  Amid a spate of European and U.S. data points, EUR/USD has been in focus since Tuesday. Data published Tuesday showed the euro zone’s unemployment rate rose to 12.1% in March, from 12.0% in February, in line with expectations. The euro zone’s year-on-year consumer price index rose 1.2% in April, below the 1.7% rate recorded in March and well below expectations for a decline to 1.6%.  Slack data points are increasing speculation that due to the euro zone’s flailing economy, the ECB will be forced into parting interest rates sooner than later. The central bank’s benchmark interest rate is currently 0.75%. Last month, the International Monetary Fund pushed the ECB to consider lowing interest rates as a means of bolstering economic growth.

Finally, it is becoming clear that economies in European South remain destabilized, as the austerity measures put heavy pressure on the real market economies. By lowering interest rates the ECB is going to attempt putting more cash in the real market, but due to the luck of coordinated action, problems in the banking sector may further exacerbate. Following the same direction Berlin remains stick to its austerity policies, although Italy’s new prime minister Letta, wants economic growth…



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