ECB head Trichet can sound more optimistic tone, while Fed faces calls to support US recovery

European Central Bank sees pressure ease

LONDON — While Federal Reserve chairman Ben Bernanke faces pressure to spur the U.S. recovery, European Central Bank president Jean-Claude Trichet can take life a bit easier.

For the first time in what must seem like ages, Trichet’s monthly press conference Thursday after the central bank’s rate-setting meeting will not be engulfed by crisis talk and questions about possible government default.

Following months of procrastination and indecision, Europe’s leaders and the ECB appear to have pulled their act together and doused the flames of a government debt crisis that threatened the fabric of the 16-country single currency zone.

The impending sense of doom that dominated for much of this year has largely gone, following a euro110 billion euro bailout of Greece from the country’s 15 partners in the eurozone and the International Monetary Fund, and a near $1 trillion rescue package for other potentially shaky countries. That won the EU breathing room, though the debt loads carried by European governments will remain a problem for years.

That may be most clearly visible in the calm market response to the stress test results into 91 EU banks, even though many observers thought the exercise too easy on the banks. The euro rose Tuesday to a four-month high of $1.3261.

Against that background, the European Central Bank has been able to scale back several crisis measures.

The ECB is phasing out emergency short-term credit operations to the banks and confirmed last week that it was tightening collateral arrangements for its lending. Meanwhile its emergency program to prop up government bond markets by buying the debt of troubled governments has nearly ground to a halt.

By contrast, U.S. officials are debating new steps. James Bullard, president of the Federal Reserve Bank of St. Louis, said last week that the Fed should revive a crisis-era program to buy government debt if the country seems headed toward a bout with deflation. Bernanke hasn’t said what the Fed might do.

“There is presently a contrast between the ongoing policy normalization at the ECB and the Fed’s decision to leave the door open to further easing,” said Jane Foley, research director at Forex.com.

The main impetus behind this divergence is that while the U.S. economy appears to be losing its steam, Europe’s economy is showing mounting evidence of coming back to life. Its marked improvement in fortunes is most evident in the industrial sector as exporters reap the dividend of a pickup in global trade.

It’s particularly difficult to ignore the strength of the recovery taking place in Germany, Europe’s economic powerhouse. That is likely to be reflected in Trichet’s comments after Thursday’s meeting, where the bank is expected to keep its main interest rate unchanged at 1 percent.

“Newsflow has turned decisively positive for the euro area over the past month, and this is likely to be reflected in a slightly more optimistic tone in the ECB’s introductory statement and question and answer session,” said Frederik Ducrozet, eurozone economist at Credit Agricole.

Trichet’s anticipated tone will stand in marked contrast to the rumblings at other central banks, most notably at the Fed.

In a speech Monday, Bernanke said the U.S. economy had a way to go before a full recovery from the recession has been achieved, especially as unemployment remains stubbornly high.

His statement was hardly a surprise given that a raft of economic data over the last few weeks has indicated that the U.S. has lost momentum. Government figures last week confirmed that the U.S. economy grew at an annualized rate of just 2.4 percent in the April-to-June quarter, down from 3.7 percent growth at the start of the year. It was the slowest showing in nearly a year and considered too weak to drive down near double-digit unemployment.

Whether the Fed actually announces a fresh round of measures at its next meeting on August 10 could well rest on this Friday’s nonfarm payrolls data for July. Should jobs creation stay muted — say under 100,000 — then the markets will be on guard for an increase in the Fed’s bond purchasing plan.

“It is only if Friday’s report is a ’shocker’ that the Fed has to consider fresh policy options,” said Neil MacKinnon, global macro strategist at VTB Capital.

Challenges clearly remain in Europe. Most notably, governments will struggle to push through the austerity measures promised to cut debt and get the markets off their backs.

In particular, the clear possibility remains that Greece will have to restructure its debt. Recent budget data suggest that Greece is ahead of target. But many analysts think the debts are so large that the government will have to seek revised repayment terms, especially if voters balk at the sacrifices being asked of them.

The austerity measures, which include big tax hikes and spending cuts, will also hurt the eurozone’s growth prospects.

Despite the recent run of strong economic data, most economists think the eurozone economy will continue only by a modest 1 and 2 percent over the coming couple of years. There are also concerns that recent rally in the euro may choke off the nascent recovery in the industrial sector as it makes Europe’s high-value exports less competitive.