The Kindest Rate Cut

The European Central Bank slashes rates -- and the U.S. applauds.

By Frank Pellegrini Friday, Apr. 09, 1999
    • FRANKFURT, Germany: Never mind the bananas -- when it comes to economic policy, what's good for Europe is often good for the U.S. And that's why when the four-month-old European Central Bank threw credibility to the winds and slashed its benchmark interest rate by a whopping half percent, Washington's economic divas breathed a sigh of relief. "The ECB was reluctant to cut, because it hasn't had time to establish its credibility as an inflation fighter," says TIME senior economics reporter Bernard Baumohl. "But Europe is in a serious slowdown, and it's only been exacerbated by the distraction of the war in Kosovo. So the bank finally moved."

    From the U.S. point of view, it was about time. With its trade deficits with Asia ballooning and U.S. consumers carrying the weight of the world on their credit cards, Washington felt it was about time somebody else did some importing. "We've been pressuring them to do this," Baumohl says. "Europe has to stimulate domestic demand and start absorbing some of those imports." The rate cut goosed stock markets on both continents, but Baumohl warns that it may not do the trick all by itself. Europe is predominantly an exporting economy, and cheaper money at home won't help its markets in Asia and Latin America get their appetite back.