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. Last Updated: 07/27/2016

EU Makes Peace With Central Bank




VIENNA, Austria -- Europe's predominantly center-left governments have signed off on a peace deal with the European Central Bank that they hope will lead to lower interest rates if economic growth slows early next year.


European Union leaders agreed at a Vienna summit over the weekend that "dialogue with the European Central Bank is progressing well."


"The balance between fiscal and monetary policies has evolved in a way supporting sustainable growth," they said in a statement.


Central banks in 10 of the 11 countries joining a new European monetary union cut key rates to 3 percent this month to underpin growth and offset the impact of the crisis in emerging markets.


In return, governments pledged to keep a tight rein on public spending and limit budget deficits, and publicly stressed that they respected the independence of the central bank.


EU leaders said conditions were now in place for sustained economic growth and a reduction in unemployment, although notably they referred to "falling" rather than "low" interest rates.


"Much has already been achieved - robust economic growth, low inflation and falling interest rates," they said.


The tone of the statement would have been unthinkable before German elections in September ousted conservative Chancellor Helmut Kohl, an implacable opponent of anything that might smack of political interference in the European Central Bank.


"Economic policy coordination is our primary goal. Long-lasting resistance in this field has been overcome," Austrian Chancellor Viktor Klima told a news conference.


One French official compared the new relationship between EU governments and the European Central Bank to that of U.S. President Bill Clinton and Federal Reserve head Alan Greenspan, in which tight budgets are supported by a more accommodating monetary policy.


Luxembourg Prime Minister Jean-Claude Juncker said that if there were a slowdown in growth, Europe could respond with both economic and monetary policies rather than by raising spending.


"I would think we are now approaching a moment when an adequate policy mix could be developed, taking on ... elements of macroeconomic policies and elements of monetary policy," he said.


"If the policy mix is adequate, you do not need the increase in effort on the spending side," Juncker said.


Less than two months ago, EU governments were at loggerheads with their central bankers, stridently calling for rate cuts to rescue their economies from the emerging-markets crisis. But the Vienna statement read like a peace treaty, acknowledging that structural reform, wage moderation and low deficits - traditional demands of central banks - were needed to underpin growth and employment.


"Appropriate and coordinated responses to economic challenges are needed ... encompassing budgetary and monetary policies as well as structural policies and taking into account wage developments," it said.


An addendum to the statement also acknowledged the exchange rate for the new single currency, the euro - a potential bone of contention between governments and central banks - would be the result of economic policies rather than a tool to manipulate the economy. Economic policy coordination would involve "close monitoring of exchange-rate developments of the euro and other EU currencies in the recognition that, in general, these should be seen as the outcome of all other policies," it said.