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| Europe Moves Toward Normalcy as Central Bank Shifts Guidance | Europe Moves Toward Normalcy as Central Bank Shifts Guidance |
| (35 minutes later) | |
| FRANKFURT — The European Central Bank took another small step toward normalcy on Thursday, indicating it was unfazed by new threats to the stability of the eurozone and world trade. | FRANKFURT — The European Central Bank took another small step toward normalcy on Thursday, indicating it was unfazed by new threats to the stability of the eurozone and world trade. |
| The bank’s policymakers, who set monetary policy for the 19-nation eurozone, held interest rates steady, but dropped language from their communiqué in which they had promised to ramp up its economic stimulus program again “if the outlook becomes less favorable.” | The bank’s policymakers, who set monetary policy for the 19-nation eurozone, held interest rates steady, but dropped language from their communiqué in which they had promised to ramp up its economic stimulus program again “if the outlook becomes less favorable.” |
| It was a subtle but important change. By omitting the phrase, which it has repeated since December 2016, the central bank was in effect saying that the eurozone was no longer in imminent danger of going up in flames, and that it was time to begin stowing the fire hoses. | It was a subtle but important change. By omitting the phrase, which it has repeated since December 2016, the central bank was in effect saying that the eurozone was no longer in imminent danger of going up in flames, and that it was time to begin stowing the fire hoses. |
| “It’s a tacit acknowledgment that the economic outlook in Europe is rosier than it was,” James Athey, a senior investment manager at Aberdeen Standard Investments, said in a statement. He added, “The reaction should not be overdone. This is an infinitesimal step forwards.” | “It’s a tacit acknowledgment that the economic outlook in Europe is rosier than it was,” James Athey, a senior investment manager at Aberdeen Standard Investments, said in a statement. He added, “The reaction should not be overdone. This is an infinitesimal step forwards.” |
| Markets reacted swiftly to the announcement, with the euro quickly jumping as much as 0.5 percent against the dollar, and the yield on the German 10-year bond, the benchmark for the region, rising five basis points. | |
| Some analysts had predicted that the central bank would make no changes in the language it uses to communicate its intentions to financial markets, in light of a confused election result in Italy, one of the eurozone’s biggest and most troubled economies. In addition, the prospect of a trade war with the United States poses a danger to the eurozone economy. | Some analysts had predicted that the central bank would make no changes in the language it uses to communicate its intentions to financial markets, in light of a confused election result in Italy, one of the eurozone’s biggest and most troubled economies. In addition, the prospect of a trade war with the United States poses a danger to the eurozone economy. |
| On Sunday about half of Italians voted for populist candidates on the left and right, while leaving no party with a clear mandate to form a government. There is now very little chance that the country will make the sweeping changes needed to break its economy out of prolonged stagnation. | On Sunday about half of Italians voted for populist candidates on the left and right, while leaving no party with a clear mandate to form a government. There is now very little chance that the country will make the sweeping changes needed to break its economy out of prolonged stagnation. |
| Its political deadlock and economic doldrums are a threat to the rest of the common currency area. Italy’s government debt, measured as a percentage of economic output, is among the highest in the world and, in Europe, second only to Greece’s. | Its political deadlock and economic doldrums are a threat to the rest of the common currency area. Italy’s government debt, measured as a percentage of economic output, is among the highest in the world and, in Europe, second only to Greece’s. |
| But Italy also has the eurozone’s third-largest economy, with output 10 times that of Greece, making it a far bigger danger to the region’s financial stability if investors begin to doubt the government’s solvency. | But Italy also has the eurozone’s third-largest economy, with output 10 times that of Greece, making it a far bigger danger to the region’s financial stability if investors begin to doubt the government’s solvency. |
| “We have to bury the hope that Italy will catch up with Germany and France with reforms,” Holger Schmieding, chief economist at Berenberg, a German bank, said over lunch with reporters in Frankfurt on Tuesday. “Italy will more likely worsen its ability to carry its debt.” | “We have to bury the hope that Italy will catch up with Germany and France with reforms,” Holger Schmieding, chief economist at Berenberg, a German bank, said over lunch with reporters in Frankfurt on Tuesday. “Italy will more likely worsen its ability to carry its debt.” |
| Italy is not the only risk for Europe to appear in recent days. Trade relations with the United States are in doubt after President Trump threatened to impose tariffs on steel and aluminum imports, prompting the European Union to consider retaliating with levies on products like Harley-Davidsons and bourbon. Surveys show that the threat of a trade war has clouded the optimism that had prevailed among European consumers and business managers. | Italy is not the only risk for Europe to appear in recent days. Trade relations with the United States are in doubt after President Trump threatened to impose tariffs on steel and aluminum imports, prompting the European Union to consider retaliating with levies on products like Harley-Davidsons and bourbon. Surveys show that the threat of a trade war has clouded the optimism that had prevailed among European consumers and business managers. |
| As expected, the Governing Council opted on Thursday to leave monetary policy unchanged. Interest rates will remain at a record low level. | |
| There is a faction on the Governing Council that is worried that inflation, now dormant, could get out of hand if the central bank waits too long to stop its purchases of government and corporate bonds, a form of money printing intended to stimulate the economy. | There is a faction on the Governing Council that is worried that inflation, now dormant, could get out of hand if the central bank waits too long to stop its purchases of government and corporate bonds, a form of money printing intended to stimulate the economy. |
| That faction has been in the minority, but appeared to win the upper hand on Thursday. | That faction has been in the minority, but appeared to win the upper hand on Thursday. |