In a nutshell: Things in Europe are bad, and getting worse.
The latest sign of rising economic desperation out of Europe came Thursday in a dour assessment of conditions by European Central Bank President Mario Draghi, who said in a statement following the bank’s monthly meeting that “the risks surrounding the economic outlook remain on the downside.”
“Certainly the outlook is being revised and there’s a picture of a weaker economy,” Draghi said, adding that “the Governing Council […] have not discussed what we’re going to do next year in terms of monetary policy.”
For the moment, rates would remain unchanged, Draghi noted.
Market-watchers interpreted the strange position the central bank had taken, of saying things were getting worse but that nothing would be done about it yet, as a way to stare down the most problematic economies of Europe, Greece and Spain, and tamp down recent impulses from leadership in those countries to move away from European-level plans to deal with the crisis.
Spain particularly is a target for the bank’s scorn lately, given the fact the country’s government has refused to sign up to a rescue mechanism unveiled in September -- but the very offer of that rescue package has helped lower borrowing costs for the country. Spanish banks have also been playing fast and loose with the ECB, pledging $16.5 billion in collateral less than they would have been required for central bank loans earlier this year, an issue that was only made public a few days ago.
Greece, where a contentious parliamentary vote taken in the midst of massive street protests only narrowly ratified austerity measures required by the country’s lenders Wednesday, was also cast as not being on the ECB’s good side.
"The ECB is, by and large, done" helping Greece, Draghi said Thursday, reiterating the bank’s view that it will not print euros to help Greece pay its debt.
Both countries, in fact, are acting in response to an enraged citizenry, fed up with high unemployment, spending cuts and -- particularly in Spain -- a mortgage foreclosure crisis. Data released Thursday showed the youth unemployment rate in Greece was 58 percent, with Spain not far behind.
The question, of course, is how much the ECB can keep its discipline. For the first time Thursday, for example, Draghi admitted the slowdown in the peripheral countries of Europe was having a toll on the German economic engine.
A European Commission report on Wednesday made the same point, noting “the distress in more vulnerable Member States has progressively started to affect the remainder of the Union.”
That report presented a baseline economic scenario where GDP growth in the European Union becomes negative in the second half of 2012 and does not go back to above zero until the last quarter of 2013.
A further question is whether the ECB still has available firepower to help Europe while the Continent’s leadership works its way out of its sovereign debt and financial crisis, now in its fifth year.
In the United Kingdom, where the Bank of England is undergoing its latest round of expansionary policy, that institution announced Thursday it was capping that effort after "some policy makers questioned its effectiveness in supporting a recovery that remains lackluster."
“In normal times, with the economic outlook in Europe, a rate cut would probably be justified,” Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam, told Bloomberg Businessweek. “But we’re not in normal times and a rate cut won’t achieve anything.”