MercoPress. South Atlantic News Agency

Trichet anticipates EU flat growth next 18 months; falls short of ‘new recession’

The ECB president said the question on the Deutch mark “was very stimulating”

The Euro fell to a two-month low against the dollar on Thursday after the European Central Bank signalled a pause in its interest-rate tightening cycle that began just five months ago.

The Euro area economy is subject to “intensified downside risks,” ECB President Jean-Claude Trichet said in a press conference in Frankfort after the bank left rates at 1.5%, marking a significant change in stance from last month when the bank was focused on inflation risks.

ECB President said there is a risk that growth will slow to a near standstill next year, but stopped short of warning of a new recession. The ECB forecast is now for growth of only 1.4% and 1.8% in 2011, and between 0.4% and 2.2% in 2012.

Both are down from earlier forecasts, and the risks to that gloomier outlook are now to the downside, rather than balanced as the ECB had previously said.

When asked if that meant that the 17 nations of the Euro zone are at risk of falling into recession, Trichet dodged the question, saying it is difficult to make forecasts in the current situation.

“There is an enormous level of uncertainty,” he said, adding that the uncertainty extends beyond Europe to other major economies around the globe.

Trichet also said the ECB staff now forecasts less risk of price increases going forward and expect the inflation rate to fall below the 2% target set by the central bank by next year.

The cloud of worry hanging over Europe include concerns about the risks of default of sovereign debt from several troubled European economies and fears that they are at risk of a default that would shake the banking system across the continent.

Trichet repeated earlier statements that it is important that those countries -- Greece, Portugal, Ireland, as well as Italy and Spain -- move ahead with budget cuts. He said it is also important for the stronger economies in Europe to stand behind their commitments to set up a bailout fund for troubled sovereign debt.

“This is our working assumption and also our goal,” he said.

The ECB has been buying up some of the sovereign debt from troubled countries in the past month as it tried to stabilize the banking system while the broader bailout fund is set-up.

Trichet said the intention was for the fund to make the bond purchases in the future, but would not comment on the ECB own plans for future purchases.

There was a moment of tension in which Trichet lost his cool when a reporter asked whether Germany should abandon the Euro and return to the D mark as Europe’s debt crisis roils markets and spooks voters.

“I would like very much to hear the congratulations for an institution which has delivered price stability in Germany for almost 13 years,” Trichet said in an uncharacteristically raised voice. “It’s not by chance we have delivered price stability,” he said. “We do our job; it’s not an easy job”.

He ended his six-minute response to the Deutsche mark question with a smile. “Thank you for your excellent question, which was very stimulating,” he said.

Trichet, whose eight-year term ends Oct. 31, has overseen decisions to cut interest rates to a record low and provide banks with unlimited liquidity. He also took the unprecedented step of buying the bonds of countries including Ireland, Spain and Italy to lower yields. As the ECB involvement in crisis fighting increased, Trichet has criticized governments for not doing enough.

While the ECB has managed to keep inflation in the 17- nation region just below 2% since 1999, 37% of Germans said the country would be better off if it reintroduced the mark, according to an Emnid survey for broadcaster N24, published on a fortnight ago. The same proportion said the country is better off with the Euro, while another 19% said that a return to the mark wouldn’t change anything, the poll showed.

This was Trichet’s second last ECB monthly meeting and press conference before he is succeeded by Italy’s Mario Draghi.