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“The ECB is obviously in a difficult position”, Ms Merkel said. “For Germany, it would actually have to raise rates slightly at the moment, but for other countries it would have to do even more for more liquidity to be made available and especially for liquidity to reach corporate financing.” While Ms Merkel’s comments reflect received wisdom among many German economists, the country’s politicians, reared on the tradition of Bundesbank independence, usually avoid expressing a view on monetary policy. Wolfgang Schäuble, the German finance minister, has also broken the taboo, saying in a recent interview that the ECB should “drain liquidity” from the system.
With unemployment rising across the recession-hit bloc, there have been widespread calls for a further easing, even though the ECB itself and most economists do not think a quarter-point cut in the main refinancing rate to 0.50 per cent will have more than symbolic value for borrowers in countries such as Spain.
The bank has long argued that the “transmission mechanism” by which its rates translate into the real-world cost of borrowing has broken down in many parts of the eurozone and that it is struggling to fix the problem. France would be the main beneficiary of a cut.
In a softening of its stance, Berlin voiced support for France’s Socialist administration, indicating that it would support the European Commission if it gave Paris an extra year to bring its budget deficit below 3 per cent.
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