If European Central Bank boss Mario Draghi had cut interest rates today, almost no one would have been shocked. That's because many of the conditions to justify a rate cut were on plain display. Growth in the 17-country euro zone is waning and unemployment is rising. Economic confidence is not rebounding. Inflation, while higher than the ECB's target of 2 per cent or less, is expected to come down.
So why did Mr. Draghi leave rates stuck at 1 per cent? Because, it seems, he wants the leaders of the 17 euro zone countries to swing into action. There's only so much the EBC can do and it has certainly done a lot, including pumping €1-trillion of cheapie long-term loans into ailing banking systems.
At the afternoon press conference in Frankfurt, he said as much: "Some of these problems in the euro are have nothing to do with monetary policy," he said. "I don't think it would be appropriate for monetary policy to fill other institutions' lack of action."
So there. German Chancellor Angela Merkel, the champion of fix-it-yourself economics, would have approved.
"The ECB looks determined to keep maximum pressure on euro zone politicians," said ING Financial Markets economist Carsten Brzeski, who added that "today's press conference was a clear signal that ECB is tired of pulling chestnuts out of the fire for euro zone politicians."
There is a lot that national governments in the euro zone can do to make their economies more competitive, improving the odds of an economic rebound. Austerity alone will not sort of the mess. Labour markets have to be freed up, closed professions have to be opened, infrastructure has to be improved, growth measures have to offset austerity. "Fiscal consolidation cannot be based solely on tax increases," Mr. Draghi said.
His stance puts even more pressure for political leaders to find ways to stop the crisis at the European Union summit at the end of this month, as if they don't have enough pressure already. Greece, which goes to the polls again on June 16, could be well on its way out of the euro zone by then, depending on which parties – pro or anti austerity – form the next government. Spain, meanwhile, is asking for a bank bailout as the country finds it increasingly hard to fund itself, thanks to scary-high sovereign bond yields.
Of course, Mr. Draghi is a pragmatist and there is little doubt that he would mobilize his weapons – a rate cut, another flood of bank loans – if the euro zone were to fall off a cliff. Indeed, his economic assessment of the euro zone was hardly rosy. While he still expects the region to recover "gradually," his answers to reporters' questions were peppered with the language of unease. He talked about "heightened uncertainty" and "increased" downside risks. "I don't think there is a silver bullet for this," he said, referring to the euro zone's seeming inability to pick itself up.
So might there be a rate cut in July? When you consider that the decision to leave rates unchanged was not unanimous, and that the term "crisis" still applies to the euro zone, the odds of a cut seem higher next time around, even if a cut is far from certain. In the meantime, Mr. Draghi will want to see some serious economic reform put in place by government leaders. If they keep dragging their sorry behinds, he may decide to be ungenerous once again.