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ECB should cut rates to avert slowdown: UN economist PDF Print E-mail
Friday, 11 January 2008

Agence France-Presse . Geneva

The European Central Bank should cut interest rates immediately to stave off a global economic slowdown, a senior United Nations economist said Wednesday.

The ECB 'should act now and not wait till everybody sees that Europe is coming down,' said Heiner Flassbeck, director for globalisation and development strategies at the UN's Conference on Trade and Development.

The Frankfurt-based bank is expected to leave interest rates unchanged at 4.0 per cent at its first meeting of the year on Thursday, leading Flassbeck to warn that the ECB will end up making a move 'a bit too late again and maybe even too little.'

France's economy minister, Christine Lagarde, said on Tuesday that the ECB should make stimulating growth its priority, even if this means a temporary rise in inflation.

Her comments are at odds with the bank's governor, Jean-Claude Trichet, who on Saturday said keeping inflation under control was at the heart of the bank's mission.

Flassbeck said the ECB would have to shoulder an ever greater burden in stimulating growth as the US economy is widely expected to run into choppy waters over the course of 2008.

'The world cannot go on with the US as the sole locomotive of the world economy.

'With the US economy really in big trouble, more than ever before in the last 20 years, it will be the part of Europe to stimulate more than they do,' he said.

'If they don't want to do it through monetary policy mainly, then they should do it through fiscal policy,' he added.

By contrast, Flassbeck criticised recent proposals by German finance minister Peer Steinbrueck to cut budget deficits by cost savings as 'exactly the wrong response.'

The UNCTAD economist warned that the full effects of the US subprime crisis have yet to be felt, and predicted the dollar could fall by up to 20 per cent in 2008 with a 'quite dramatic' negative impact in the rest of the world.

'Nobody knows exactly how much additional value will have to be written off and how much losses will occur in the financial system as a whole in the US and elsewhere,' he said.

'The US will do what is necessary to avoid a recession,' Flassbeck said.

'If the signal gets stronger that a recession is ahead, then clearly the Federal Reserve will cut rates further ... and they will definitely not mind what happens with the dollar,' he added.

House prices in the US are expected to fall between 5 and 15 per cent in 2008 while investment in the sector is seen down 30 per cent.

Flassbeck also warned of 'smaller subprime icebergs' in Britain and Spain particularly.

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