BERLIN (MktNews) - The European Central Bank (ECB) could have prevented the current eurozone downturn had it followed the U.S. Fed's example and lowered interest rates at the first signs of slowing growth, Gustav Horn, chief economist of the renowned German Economic Research Institute (DIW), told German radio in an interview broadcast Thursday.
Further, a rate cut by the ECB now would stabilize the eurozone economy by year-end at the earliest, Horn said.
The ECB has kept its key minimum bid rate at 4.75% since last October following seven consecutive rate hikes totalling 225 basis points. ECB Chief Economist Otmar Issing said Wednesday that while the EMU growth outlook for 2001 recently dimmed, it still remains robust.
Asked if the ECB should have cut interest rates as did the Fed when the first signs of an economic slowing became apparent, Horn replied: "That would have been necessary a long time ago. Only then one could have hoped that the (economic) downturn could have been stopped early on."
"As it stands now, the economic downturn (in the eurozone) can not be prevented any more," Horn told Deutschlandradio.
However, if the ECB were to cut interest rates now "it could stabilize (economic) developments by year end," Horn said.
Horn also said that the recent downturn in Germany was mainly caused by weak domestic demand, partly due to the moderate wage settlements in many business sectors. Many German trade unions agreed moderate two-year wage contracts last year.
The DIW is the most left-leaning of Germany's six leading economic research institutes. Several institutes, including DIW, recently revised down their growth forecasts for Germany.
The HWWA cut its 2001 GDP projection to 2.3% from 2.7%. The Kiel institute cut its forecast to 2.1% from 2.4%, Ifo to 2.4% from 2.5% and DIW to 2.1% from 2.5%. However, the German government is sticking to its forecast of +2.75%, though Finance Minister Hans Eichel has stated that this represents growth at the lower end of a range from 2.675-2.825%.
Weak domestic demand in Germany was responsible for slowing growth there, Horn said. "That (weak domestic demand) is caused by the poor business trend and the moderate wage agreements (in Germany)," Horn said.
However, the landmark German tax reform -- which came into effect at the start of this year -- would help to prevent a recession in Germany, Horn said. "The tax reform will surely have a positive effect and will be a counterbalance, that is why we do not see a recession this year (in Germany). However, growth (in Germany) is still disappointing," Horn remarked.