ECB fails the test

There will be much hair-pulling today in European finance ministries at the European Central Bank's failure to lower the cost of borrowing.

In an act of economic perversity, the ECB decided to leave rates unchanged at 3.75% at a time when the word economy is reeling from the shock administered by the September 11 attacks on America and when European economies are barely growing.

For European finance ministers, the ECB president, Wim Duisenberg, must seem like a latter-day Nero, fiddling on about inflation while an economic slump is the main threat to the eurozone. But it is not as if Mr Duisenberg did not warn us.

At the G7 meeting of the seven leading industrialised countries in Washington last weekend, Mr Duisenberg said interest rates at the moment were "consistent with maintaining price stability over the medium term".

There were other hints too. On Tuesday, the Austrian central bank governor, Klaus Liebscher, who hosted today's meeting, chirruped that the eurozone did not face a risk of recession.

This is not how it looks to most people. Economic growth is weakening in France and Germany, sharply undermining consumer confidence around the region. In the latest stark warning on the impact of the September 11 attacks, the UN yesterday warned of a "vicious cycle of downward adjustment" spreading out from the ailing US economy after the suicide raids.

The UN expects the world economy to grow by just 1.4% this year, down from 2.4% only three months ago.

It was not surprising then, that the Belgian finance minister Didier Reynders, and his French counterpart, Laurent Fabius, dropped broad hints at the G7 meeting that the ECB had room to lower the cost of borrowing.

The ECB did not bite. Either the bank believes it has to demonstrate its anti-inflation credentials as a fledgling institution, or it is misreading the economic tea leaves. If the latter, perhaps ECB officials are mixing something stronger with their tea.

At least the US sees the danger signals and is taking appropriate action. The US Federal Reserve Board, under its chairman, Alan Greenspan, is doing its utmost to forestall a steep downturn. Last week it lowered the cost of borrowing by a half-point to 2.5%, its lowest level in almost 40 years.

The White House and Congress are chipping in as they put the finishing touches to a $100bn (?69.4bn) stimulus package; a combination of tax cuts and government spending.

Despite strong consumer spending, the Bank of England also cut rates last week by a quarter-point to 4.5%. To be fair to the ECB, it did cut rates on September 17, in concert with the Fed, but it reverted to form today.

The ECB insists that inflation is its main preoccupation. But this battle seems to be going in the bank's favour. In August, eurozone inflation edged down to 2.7% from 2.8% a year ago, continuing its decline from its eight-year peak of 3.4% in May.

Moreover, the ECB expects to see inflation fall below its 2% target early next year, in which case, the ECB certainly has enough room for more cuts.

By failing to make a move today, the ECB will have done little for its credibility at a time when Europe needs to play its part to boost growth.

The buck now passes to the European governments. They have to decide whether to stay in their economic straitjackets imposed by the EU's growth and stability pact - which puts the emphasis more on stability than growth - or adopt stimulus packages of their own.