BRUSSELS, June 6: The European Central Bank’s cut in interest rates could help kickstart Europe’s ailing economy, but recovery remains far from certain amid stubbornly weak confidence and a strong euro, analysts said on Friday.

The ECB’s 0.50 percentage point cut off its central “refi” refinancing rate on Thursday came as Brussels confirmed stagnation in the eurozone economy so far this year.

Europe as a whole has avoided recession for the moment notably thanks to France and Spain. The continent’s biggest economy, Germany, has slipped into recession and other countries are not far from it.

“The ECB’s policy, which didn’t close the door to further monetary loosening, should allow Europe to escape recession,” said economist Nicolas Sobczak of Goldman Sachs, which is forecasting a rebound in growth in 2004.

“The ECB’s gesture is a step in the right direction that should help a recovery in growth, more or less in the long term, by stimulating domestic demand,” added Jean-Francois Mercier of Citigroup.

The recovery in domestic demand “would help compensate for the weakness of exports,” hit by the surging euro in recent months, he added.

According to the EU statistics agency Eurostat, European exports slumped by 0.6 per cent in the first quarter of 2003 after a 0.2 per cent drop in the previous quarter.

Concretely, the ECB’s decision will help businesses by providing cheaper credit, and banks by allowing them to improve their margins and open the taps of loans, said analyst Philippe Weber of CPR-AM.

But to take advantage of that credit, businesses and householders need confidence. “Confidence is returning,” said French Finance Minister Francis Mer on Thursday.

But for consumers “nothing can be taken for granted so long as unemployment is on the increase,” said Mercier.

“The rate cut makes the climate a bit better generally,” but in the short term recovery will depend above all on a reduction in the value of the euro and a rebound in the US economy, said Weber.

Doubts however remain over a weakening of the euro, in particular because its current high exchange rate against the US dollar is linked to the greenback’s weakness.

“Recessionary and deflationary factors” are still threatening the European economy, warned Emmanuel Ferry, economist at Exane.

In any case “monetary policy cannot on its own cancel out the threat,” said economy Eric Chaney of Morgan Stanley. The danger is that Germany falls into deflation, drawing its neighbours down with it.

“A state of emergency calls for an emergency remedy,” he said, adding that Germany should be allowed to breach eurozone budget rules that are preventing Berlin from spending its way to growth.—AFP