Sound bites: Eurozone inflation and unemployment hightlight Eurozone policy still too tight

Eurozone inflation has accelerated to 1.4% in May from 1.2%, while unemployment continues its relentless upward ascent, hitting 12.2% in April. The Eurozone’s economic woes are piling up. Low inflation and record high unemployment show in stark relief that Eurozone monetary and fiscal policy is far too tight. Recession still holds sway. There will be no relief until the ECB eases monetary policy dramatically and Eurozone governments steer fiscal policy resolutely away from austerity. Recession, low inflation, domestic credit contraction and high unemployment underline that the Eurozone is heading for a catastrophe unless the authorities act quickly.

The ECB needs to get rates down to zero and embark on a massive programme of quantitative easing as soon as possible. The Eurozone needs to be flooded with easy money and a surfeit of cheap credit. Austerity needs to be ditched as soon as possible and fiscal policy needs to be switched into counter-cyclical, pro-growth stimulus. A return to Keynesian  economic regeneration is needed right now. German opposition has to be ignored. Without a massive sea-change in policy soon, the Eurozone risks being condemned to years of bouncing along the bottom of recession. A plunge into depression could be waiting in the wings, putting the EU experiment at deep risk.

Sound bites: Eurozone economic confidence recovers to 89.4 im May from April's 88.6

Eurozone economic sentiment might have recovered modestly in May, but the outlook for growth still appears exceptionally grim. There is nothing to celebrate yet in these figures. The veil of uncertainty over recent debt crisis fears might have lifted somewhat, but Eurozone economic confidence is still stuck in a deep rut. It’s going to take a lot more than present stimulus initiatives to mend the Eurozone’s ailing economy. Government austerity, deepening recession and high unemployment are all taking their toll on confidence. Clearly, there is a clarion call for the Eurozone authorities to change tack and do a lot more to revitalise recovery prospects.

At least the ECB have responded to some degree by cutting rates to historic lows while some governments are starting to turn their backs on tougher austerity. But the ECB’s work is not over  yet and there is still much more to be done on the monetary easing front. Also Eurozone fiscal policies need to be reversed from austerity to out-and-out pro-growth economic regeneration. Without change, the Eurozone will be condemned to years to on-going recession and vibrant recovery could be denied for at least a further decade. Japan has already been there and it is time that Europe woke up to the risks of a very avoidable mistake. Policy needs to change and it needs to change quickly.

Sound bites: Weak Eurozone M3 money supply remains on a weak trend

Eurozone M3 money supply has accelerated to 3.2% in April from 2.6% but it does not let the ECB off the hook for further policy easing. M3 growth is still operating well below the ECB’s 4.5% growth target. The weak trend of Eurozone M3 money supply in the last few years tells us exactly why the Eurozone is stuck in recession. The Eurozone is suffering domestic credit contraction rather than the vital credit expansion that is absolutely vital life-blood for recovery. Lending growth is still stuck in negative territory at -0.9%. Consumers and the corporate sector are being starved of the cash needed to fund stronger economic activity. Consumers need access to more credit to support spending. Companies need access to easier credit to finance investment and growth. Neither are getting it. Without it, vibrant Eurozone recovery could be denied for years. The ECB has passed plenty of liquidity through to the banks in the last few years. The banks are simply not passing it through to the people who need it most.

The ECB can only go so far with policy in its conventional sense. Rates have come down to rock bottom and the Eurozone has supposedly been awash with liquidity. But it is not reaching the parts of the economy that really need it. There is still a strong case to extend conventional easing into other shapes and forms. Banks need to come under some strong duress to meet lending targets and there is probably a strong case now for extra measures, including quantitative easing. With Eurozone inflation and money supply growth both operating well below their specified official targets, the ECB has a very clear signal that monetary policy is still too far too tight and needs to be eased a lot further if Eurozone recovery has any chance of seeing the light of day before 2015.

Sound bites: German IFO business climate taps into more positive vein in May - rises to 105.7 from 104.4 in April

Finally German business confidence seems to be tapping into a more positive vein. It seems to be homing in on the brighter recovery signals in the economy and putting the bad news of the Eurozone debt crisis behind it. Business sentiment is recovering, consumer sentiment is picking up and Germany has been spared a double dip recession by the skin of its teeth. German exports are doing better, consumer confidence has more spring and the stronger tone in the German stock markets will have boosted optimism. Business sentiment should also have been encouraged by the ECB’s on-going commitment to keep monetary policy at a very accommodative setting. The German economy may be coming out of casualty and faring a little better in recovery, but a return to fuller health still needs a lot more care and attention.

Germany is in no isolation ward. It’s recovery is critically dependent on the health of its partners in the Eurozone, who are faring a lot worse. For its own on-going recovery, Germany needs to ensure that the grounds for growth are set in motion elsewhere in the Eurozone. It needs to give its full blessing to the ECB’s monetary stimulus and it also needs to give much better consent to other Eurozone governments ditching tougher fiscal austerity in favour of more growth oriented budget policies. The IMF has already identified the need for Keynesian counter-cyclical stimulus in the Eurozone. Hard as it may seem for Germany, it must adopt a similar position or else any hopes for Eurozone recovery and fuller growth in Germany will wither on the vine.

  GERMANY                  MAY 2013    APRIL 2013   MAY 2012
 BUSINESS CLIMATE         105.7       104.4       106.6

 CURRENT CONDITIONS       110.0       107.3       113.0       
 FUTURE EXPECTATIONS      101.6       101.6       100.6

The headline business climate index compared with the Reuters consensus forecast for a reading of 104.5

Sound bites: UK retail sales plummet 1.3% mom in April

The weak UK retail sales data underlines exactly why the Bank of England need to keep monetary policy at a very easy setting. It is far too soon for the monetary sceptics to start thinking about no more QE. The UK economy is a long way off even moderate health. With retail sales dropping 1.3% in April after a 0.7% fall in March, the cracks in consumer confidence are clear to see. The pound in consumers’ pockets is being badly eroded by negative real wages, high energy and transport costs and the large bite being taken out by the government’s austerity policies. Rising taxes are taking a huge toll on consumers’ disposable incomes and confidence to spend.

There are two ways out of the dilemma. Either the Bank of England needs to drop interest rates down to zero and ply the UK economy with massive quantitative easing. Or else the government needs to effect a U-turn on its austerity measures and start spending for recovery and growth. What would work best would be a compromise on both sides. Rather than working in isolation and at odds, the Bank of England and the UK government need to work together with much more effective and long lasting counter-cyclical economic stimulus. The BOE seem ready, but the government’s commitment is sadly lacking.

Sound bites: UK BOE leaves policy unchanged - waiting for Carney

It’s all about waiting for Carney. It’s no great surprise that the Bank of England has left policy in fast cruise control, leaving it until Carney arrives before deciding whether to shift policy stimulus up a few more gears. There is no doubt about it, there is still a lot of work to do bringing the UK economy back to life. While there are some early signs of spring in the recovery’s step, the UK still needs a lot of intensive care. Right now, the Bank is working hard to over-compensate for the stimulus being removed by the government’s tough fiscal austerity. Sadly the economy is still at a relative standstill and needs a lot more injection of monetary stimulus to jumpstart it into stronger life.

Receding inflation pressures, low wages growth and weak economic demand means there is nothing to fear from adding extra monetary stimulus. There is plenty of slack in the economy for the BOE to do more without the risk of sparking overheating pressures. As UK rates are at rock bottom, it means that the door to more QE must remain wide open ahead. The latest weakness in retail sales underlines the risks to the economy. Consumer confidence is still in a parlous state and the Bank needs to ensure that economic demand is fully propped up and well before the debate about unwinding QE enters into the equation. We are a long way off from that stage.

Sound bites: UK inflation drops to 2.4% in April from March's 2.8%

The sharp drop in UK headline inflation from 2.8% to 2.4% should come as welcome relief to the Bank of England. But it still bodes ill for the UK economic outlook. The UK’s slowing rate of inflation, low wage growth and the tepid pace of recovery are all clear signs that UK economic policy is still far too tight. The Bank of England may be doing their level best to prop up the economy with ultra loose monetary policy, but the government’s extremely tight fiscal policy is still wreaking huge damage on growth prospects. Unless the government changes direction quickly, it risks condemning the economy to bouncing along the bottom of sub-par growth for years.

The message for monetary policy is that the Bank of England must continue to bear the brunt of anti-austerity stimulus for a long while. With inflation coming down, wage growth so low and unemployment remaining relatively high, there is little risk of the Bank’s monetary measures spilling over into economic overheating. There is little chance of UK rates going back up for some time to come, possibly not until 2015.

Sound bites: no Eurozone inflation pressures - headline inflation at 1.2% in April vs 2% ECB target

With headline inflation running so low below the 2% target and the Eurozone so deeply steeped in recession, it proves the ECB’s policy settings are still far too tight. This is a clear green light to the ECB to ease monetary policy again very quickly. With disinflation trends already entrenched, at some stage the ECB will need to start worrying that the next step could be deflation. The ECB cannot to afford to be complacent as any delay would be at the Eurozone’s peril. If deflation risks set in it would be very hard to vanquish as Japan is learning to its cost right now.

On both sides of the price equation, inflation pressures are extremely light. On the demand side, the recession is keeping a lid on domestic prices and wages, especially while unemployment mounts. On the supply side, energy and commodity price rises are less of a threat, especially while the strong euro remains such an effective inflation foil. With money supply growth and headline inflation running so low below target, the ECB has no reasonable excuse not to ease again soon. In fact it is imperative that they act very quickly to avoid getting further behind the curve on easing. The ECB have dragged their feet far too long. Mercifully, Draghi seems to be picking up the baton for a more much proactive approach than his predecessor Trichet.

While the rate cutting cycle is close to the end of its cycle, there is plenty more the ECB can do through conventional and unconventional means. The ECB should ensure it plies the Eurozone with plenty of excess liquidity to turn domestic credit contraction into credit expansion. It needs to get much stronger lending flows through to consumer and corporate borrowers to fuel stronger economic activity. The ECB also needs to exorcise its demons and consider extra monetary measures through quantitative easing. If the US and Japan can succeed in propping up their economic recoveries through quantitative easing, it is an anathema that the ECB needs to vanquish very soon for the Eurozone economy’s sake.

Germany's IG Metall agrees a 5.6% pay deal in Bavaria. Is it a big game-changer?

Germany's powerful IG Metall industrial union has agreed to a staggered wage deal in the key state of Bavaria, which will see wages in the metals and electrical engineering industries rise 5.6% over the next 20 months. If this serves as a pilot for other German regions, will this be a big game-changer, setting the scene for a German consumer-led recovery as some seem to be claiming in Germany right now?

If the deal in Bavaria succeeds in setting the benchmark for the rest of Germany, it will have positive ramifications for the recovery. A pay rise worth 5.6% over the next 20 months beats inflation and substantiates the rising trend of real wages in Germany. It will boost consumer confidence especially as it is backed up by a reasonably strong labour market at the moment. Whether it is going to be the saving grace for sustainable economic recovery is a different question. German consumers tend to be perennially cautious and the propensity to save in uncertain times tends to dominate thinking. The GfK consumer sentiment index has risen to a 5-year high, but optimism is still relatively flat and flaccid compared to previous upturns. The IG Metall deal will help, but the odds for a substantive consumer-led recovery at this juncture are not overwhelming.

For the time being, Germany has to rely on its age-old, time-tested export-led recovery at this stage. That model tends to be driven by faster exports, feeding into stronger output and investment intentions, with stronger employment and consumer spending bringing up the rear. Nothing changes the picture this time around. Germany might have been spared recession in the current round, but the economy is not out of danger yet. Consumers will do their bit in the recovery process, but it will be the general health of the world economy and the Eurozone and the impact on German exports which will still carry the whiphand

Sound bites: The Eurozone sinks deeper into recession - 1st quarter GDP drops by 0.2% qoq

The Eurozone is sinking deeper into recession and economic policy needs a radical rethink. This current recession is now longer than the 2008-2009 downturn and has no chance of abating soon, without a quick and substantive u-turn in Eurozone monetary and fiscal policies. Economic sentiment is on the rocks thanks to the debt crisis, inappropriately tough austerity policies and rising unemployment. The demand picture remains deeply depressed right across the board. Consumers are reeling, companies remain deeply cautious, governments are cutting back and the global trade outlook remains uncertain. The only potential bright spot is Germany which has been spared recession. Sadly German recovery at this stage is far too tepid to offer any meaningful help to the rest of the Eurozone. A change of policy direction is needed – and quick. Germany decoupling from the rest of the Eurozone simply rubs salt into a deepening political wound.

Eurozone policymakers need to redouble their efforts. As ECB rate cuts may be close to an end, the ECB must turn to unconventional monetary measures soon. A switch to quantitative easing must be applied. The ECB needs to pick up the QE baton in the same way as the US Fed and Japan’s BOJ to promote growth. It needs to flood the Eurozone with excess liquidity especially while inflation risks are so low, to help refloat recovery expectations.  At the same time, Eurozone governments need to abandon tough austerity in favour of fiscal policies promoting growth.

Without a change of direction soon, the odds are that the recession will extend through 2013 and spill over into 2014. A deepening recession would imply no going back with growing risks of the Eurozone blowing apart in the future.

(percentage change)
                          2013            2012  
    EURO ZONE           Q1  POLL      Q4    Q3    Q2
    pct change q/q    -0.2  -0.1*   -0.6  -0.1  -0.2 
    pct change y/y    -1.0  -0.9**  -0.9  -0.7  -0.5 

EUROPEAN UNION
    pct change q/q    -0.1          -0.5   0.1  -0.2 
    pct change y/y    -0.7          -0.6  -0.4  -0.3 

* Reuters poll of 34 economists, range -0.7 to 0.1 pct
** Reuters poll of 25 economists, range -1.5 to -0.6 pct

Sound bites: Germany just avoids recession in the first quarter - GDP rises by a slender 0.1% qoq

Germany can breathe a huge sigh of relief as it has avoided recession in the first quarter by the skin of its teeth – by a bare 0.1% expansion. Germany may be emerging into the light of recovery but it can ill-afford to rest on its laurels. Germany’s fate is still inextricably tied in with the rest of the Eurozone and the outlook there still remains deeply at risk. There are potential problems looming between Germany and France now as their respective economic outlooks continue to diverge. It is a tale of two economies. Germany sowing some seeds of recovery, while the French economy is in trouble, dipping back into a second successive recession in less than two years.

Germany may be showing some bright spots but it is by no means out of the woods. German industrial order books, output and exports may be picking up momentum, but there are still dead spots in the economy. Stronger domestic demand is still being thwarted by perennially cautious consumers, while construction is still a net drain on German growth. Whatever benefits may accrue to German exporters from the US and Japan’s massive monetary mobilisation to spark global recovery, the Eurozone debt crisis remains a major millstone round Germany’s neck. German policymakers need to think outside the box.

German recovery still needs careful nurturing with sympathetic monetary and fiscal policies – not just domestically but throughout the Eurozone as well. Germany needs to give full backing to the ECB’s stimulus efforts to boost recovery and give its blessing to Eurozone governments to water down deep austerity constraints. Germany and the Eurozone need to pull together and grow their way out of trouble. Germany needs to work in unison, not in isolation.

Sound bites: Eurozone industrial production excells with a 1.0% mom jump in March

At long last, the Eurozone has some good news on the economy even though it is mainly thanks to the strong German recovery and a cold weather fuelled jump in energy output. It is a relief to see a change from the dour news that has dominated from the debt crisis in recent months. It will still be a long haul out of recession for the Eurozone, but at least Germany is leading the way to recovery. Besides the 3.8% mom jump in energy output due to the cold weather spell at least there are some other bright spots. Output of durable consumer goods jumped by 1.9% mom, perhaps indicative of some embryonic life coming back into Eurozone consumer sentiment. Capital goods production increased by 1.2% mom, suggesting some signs of recovery in the global investment cycle, even though it may be bypassing capital restructuring in the Eurozone outside of Germany.

The jump in Eurozone industrial production in March is not the end of the story. Nor does it let Eurozone policymakers off the hook. There is a long way to go before the Eurozone economy is out of the woods on recession. The ECB needs to ply a lot more monetary stimulus across the board to fuel recovery. Eurozone governments also need to effect a massive U-turn away from austerity, back towards counter-cyclical fiscal stimulus. Mercifully, some EU governments are already starting to throwing off the shackles of deep budgetary restraint, but there is still a long way to go. The Eurozone will still be steeped in recession throughout 2013, but it will depend on a deep change of heart to ensure recession does not endure through into 2014. It is not over yet.

Industrial production - monthly variation
pct change compared with previous month (seasonally adjusted)
                             Oct-12  Nov-12  Dec-12  Jan-13  Feb-13  Mar-13
 EA17                                                               
 Total industry                -0.7    -0.7     0.7    -0.6     0.3     1.0
 Intermediate goods            -0.7    -0.9     0.2    -0.1    -0.2    -0.1
 Energy                        -1.0    -0.4    -1.4     0.1     1.9     3.8
 Capital goods                 -1.9     0.2     0.8    -1.7     0.9     1.2
 Durable consumer goods        -1.7    -1.3     1.9    -1.8     0.7     1.9
 Non-durable consumer goods     0.9    -1.4     2.0     0.2    -1.5    -0.7
 EU27                                                                     
 Total industry                -0.5    -0.6     0.6    -0.5     0.3     0.9
 Intermediate goods            -0.6    -0.9     0.3    -0.2     0.1    -0.2
 Energy                        -0.9    -0.1    -0.8    -0.3     1.2     3.0
 Capital goods                 -1.5     0.2     0.8    -1.4     0.6     1.2
 Durable consumer goods        -0.5    -1.7     1.1    -0.7    -0.2     2.2
 Non-durable consumer goods     0.5    -1.3     1.4     0.7    -1.4    -0.2

Industrial production - annual variation
pct change compared with same month of the previous year (working day adjusted)
                             Oct-12  Nov-12  Dec-12  Jan-13  Feb-13  Mar-13
 EA17                                                               
 Total industry                -3.1    -4.0    -2.1    -2.5    -3.2    -1.7
 Intermediate goods            -4.2    -5.6    -4.8    -4.1    -3.1    -4.6
 Energy                        -0.3    -0.3    -0.3    -1.1    -6.5     9.2
 Capital goods                 -3.6    -4.4    -1.8    -3.9    -3.8    -3.1
 Durable consumer goods        -5.3    -6.5    -2.7    -7.3    -5.1    -2.2
 Non-durable consumer goods    -1.9    -2.3    -0.3     1.8     0.6    -3.1
 EU27                                                                     
 Total industry                -2.9    -3.6    -2.1    -2.5    -2.6    -1.1
 Intermediate goods            -3.7    -5.0    -4.4    -4.3    -2.7    -4.0
 Energy                        -1.5    -1.1    -0.6    -1.2    -6.2     6.7
 Capital goods                 -3.0    -3.8    -1.5    -3.2    -3.0    -2.1
 Durable consumer goods        -3.4    -5.6    -3.0    -5.3    -4.3    -0.7
 Non-durable consumer goods    -1.7    -2.1    -1.0     1.1     1.0    -1.8

Sound bites: German ZEW economic sentiment stabilises at 36.4 in April (versus 36.3 in March)

It looks like German ZEW economic sentiment is throwing off the recent Cyprus crisis wobble and starting to show signs of stabilising. In the last few months there has been a clear disconnect between what the German business surveys and the real economy data and markets have been saying. German business sentiment surveys like ZEW and IFO have been tapping into a deep vein of negative energy due to the Cyprus crises. Meanwhile, German real economy data like industrial orders and production and trade data appear to be much more upbeat as the German recovery starts to get into its stride again.

Germany seems to have avoided recession in the first quarter by the skin of its teeth and the positive forward momentum seems to have re-engaged. The German equities markets now seem to be deriving a lot more positive drive from the hard data rather than the surveys. It is probably time for them to come back into synch again and for the surveys to start reflecting the positive economy story rather than the old news coming out of the Eurozone debt crisis.

It looks like the Eurozone is over the worst of the debt crisis for the time being. While the Eurozone authorities seem to be succeeding in managing the short term disturbances like Cyprus, it gives the markets an opportunity to focus on more of the positive aspects of the recovery story coming out of Germany. The Eurozone is not out of the woods by any stretch of the imagination. As the explosion of central bank money from the US and Japan continues to heal the global economic picture, the German recovery should be able to harness more upward momentum as the export outlook brightens.

Germany and the troubled Eurozone economies are poles apart in terms of where they are in the recovery cycle and Eurozone policymakers should not confuse them. While Germany continues to pull away, the rest of the Eurozone still needs a lot more stimulus efforts from the ECB and government fiscal policies before the Euro area is off the recession rocks.

Sound bites: UK BOE monetary policy stays on ice

No great surprise that the Bank of England has decided to keep monetary policy on ice for yet another month. With new BOE head Carney due on board in July, the BOE will keep policy ticking over in neutral to wait and see what new policy initiatives Carney might need to pull out from his war chest to help turbo-charge recovery in future.

The recent positive news on the UK economy should also convince the Bank to keep its powder dry for the moment. Embryonic recovery seems to be emerging from consumers and from industry at the moment. The economy seems to be steering away from recession and the key decision awaiting Carney will be whether he needs to lean with the wind to help the recovery on its way up. The outlook still contains elements of uncertainty, not least the headwinds blowing from the Eurozone debt crisis and the drag effects of the government’s austerity measures. It is up to the BOE to lay more groundwork for sustainable recovery ahead. More monetary easing should not be ruled out at this stage. This will have to take the shape of further  quantitative easing as the Bank have reached rock bottom on further rate cuts.

Sound bites: UK industrial production clawing its way back - rises 0.7% mom in March

The rise in UK manufacturing and industrial output confirms that the UK is breaking free of recession and clawing its way to firmer ground. The numbers firmly corroborate that the UK economy did indeed avoid a triple dip into recession in the first quarter. The positive gain in industrial production combined with the rise in consumer spending witnessed over the first quarter should underline that the UK economy is slowly but surely getting itself back on the road to recovery – albeit slow recovery.

We will have to wait and see what the new incumbent Bank of England governor Carney has got up his sleeve for turbo-charging UK recovery when he comes on board in July. The government should be warned that they should not rest on their laurels and be complacent about these numbers. The UK economy is still in a parlous state and recovery still needs careful nurturing over the next few years. Stimulus is probably going to be led by more monetary initiatives, but the government needs to avoid upsetting the applecart with too tough austerity.

Sound bites: German industrial production rises 1.2% in March (revised +0.6% in February)

March’s 1.2% jump in German industrial production is a further boost to hopes that Germany's economic spring has finally arrived. Coming on the heels of the 4.4% rise in industrial order books in February and March, it should ensure German output should extend its positive run over the coming months. The economy looks set to move above its long run optimum output potential fairly soon.

However the economic success in Germany should not be confused with the economic doldrums facing the troubled Eurozone economies . Germany has been building up its strengths since post-unification and the economy is turning up trumps after decades of re-structuring and intense capital investment. A large part of the Eurozone is suffering severe austerity in the wake of the debt crisis. Those problems look set to extend with the troubled economies bouncing along the bottom of recession for years to come.

There is a mixed message for Eurozone policymakers. It’s no wonder that Germany is looking for the stimulus taps to be turned off, while policymakers elsewhere are looking for a much faster flow of policy regeneration from the ECB and Eurozone governments.

Sound bites: German industrial orders rebound by 2.2% for second month in a row in March

March’s 2.2% bounce in German industrial orders may be showing some early signs of light at the end of the tunnel. Economic spring might be arriving for Germany, but for much of the rest of the Eurozone, economic winter is still deeply entrenched. Export orders seem to be in the vanguard of recovery which suggests some tentative glimmers of hope that global demand for German capital and investment goods may be turning the corner to better recovery. It could also be a positive proxy signal for the global economy at large. What is encouraging is that German order books seem to be returning to their long term optimum output trend.

Eurozone policy makers should not delude themselves that they are out of the woods by any stretch of the imagination. Germany is a very different story to what is happening in the rest of the Eurozone. The Eurozone is still stuck in the jaws of recession, while the German economy seems to be gaining a firmer foothold thanks to the success of its export powerhouse. The debt crisis is still at the root of the Eurozone’s economic doldrums and much more policy balm still needs to be applied before the situation can be reversed and economic recovery can be guaranteed.

What will help are signs that the ECB are still ready to cut rates again to jump-start recovery, while some EU governments are ready to ditch tougher austerity in favour of more moderate fiscal policies. In the long run, only this will dictate whether Germany’s recovery can withstand the present headwinds and not succumb to a deeper economic maelstrom.

Draghi speaks easy at ECB press conference

Draghi has continued to speak easy at the ECB press conference but a looser tongue is still needed. The weak economy, tame inflation, and tight credit conditions all lie behind the ECB's rate cut thinking. More work clearly needs to be done. The fact that the ECB remains committed to closely monitoring money market conditions shows the propensity for  more action ahead. Another rate cut should not be ruled out, but it is clear the main thrust of policy in future will have to come from further liquidity measures. It is not announced in this round, but extra generous liquidity facilities should be underway in the coming months.

Weak loan dynamics, heightened credit risks and ongoing balance sheet adjustment underline the tight loan conditions which the ECB quickly needs to counteract. The rate cut is a start, but it still smacks of re-arranging deckchairs on the sinking ship, when a much harder effort on the monetary bilge pumps is needed to refloat the Eurozone off the recession rocks.

The ECB's toolbox for remedial action is looking increasingly empty. Soon the debate will start to shift towards unconventional measures and at some stage the ECB will need to start wrestling with its demons over quantitative easing. The direction of the ECB policy debate will not be going down too well with Germany. That was clearly at the root of Merkel's anti-rate cut intimations over the last week. It will be further cause for internal ECB policy ructions. Germany is bound to loose out on a simple count of hands.

If the ECB recognise the negative multiplier effects of Eurozone austerity policies, then it must mean the central bank must re-double its efforts to stimulate recovery via extra monetary means. Over the long term, extra ECB monetisation must mean negative downstream effects on the euro. While euro optimists are maintaining a brave face for the moment, a return to sub-USD1.20 territory is looking increasingly likely as the tables turn towards more ECB policy presciptions later this year. Without more effective stimulus measures, it means the Eurozone must be condemned to deeper and more extended recession, probably spilling over into 2014. The result will be the same for the euro in any case - a return towards sub-USD1.20 territory as the economy sinks deeper.

Sound bites: ECB rate cut just the start of a new policy initiative

The ECB rate cut is no surprise as it was well flagged by Draghi at last month’s meeting. Is it enough? No. The marginal effect of the cut is very limited, but at least it should have some symbolic rallying effect on economic confidence. The ECB cannot afford rest on its laurels and stop with a simple rate cut. The ECB rate cut should just be the start of a new policy initiative. There is a lot more work to be done. Entrenched Eurozone recession and the fast falling inflation rate underline that ECB monetary policy is still far too tight. To avoid falling into the same deflation rut that Japan has been stuck in for ages, the ECB needs to work fast and it needs to pull out all the stops. The ECB must open up all its monetary throttle to get any hopes of recovery going again in the near term. It needs to take a big leaf out of the US Fed’s and BOJ’s policy books and flood the Eurozone with a surfeit of liquidity to refloat the Eurozone’s sinking economy.

The ECB needs to resort to any sort of new measures to rescue the Eurozone economy – conventional and unconventional. While it may be anathema to the Bundesbank, the ECB needs to open up the stop-cocks to quantitative easing to inject much more monetary muscle into the financial system and economy. The ECB needs to ensure the liquidity that has flooded into the banking system reaches borrowers in the shape of much easier credit. The Eurozone is suffering a haemorrhage of potential stimulus as domestic credit continues to contract at a fast pace. This needs to be quickly corrected.

Much easier ECB monetary policy needs to be matched by a u-turn in EU government fiscal policy, away from austerity towards growth promotion. The Eurozone needs 4-speed policy stimulus, which requires easy rates, easy money, easy budgets and an easy currency. Perhaps a big factor in the recovery plan should be a tacit abandonment of the strong euro. The ECB can afford to talk the currency lower to allow a boost to Eurozone export competitiveness. Germany would not be the only beneficiary as the troubled Eurozone economies could get a vital lift to their struggling export industries. There is no inflation risk to worry about. If there is a risk, it is that Eurozone inflation could become too low, if deflation forces set in. The ECB needs to throw caution to the wind and follow the same path as the US, Japan and the UK with a much more vital monetary lift to economic recovery prospects.