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What Will European Central Bank Action Accomplish?

By David McHugh

FRANKFURT, Germany -- Investors and analysts are nearly certain: The European Central Bank will take action at its next meeting to boost the tepid recovery.

What's not at all certain is how much good that can do.

Any help is needed. The weak recovery in the 18 countries that use the euro is a source of risk and uncertainty for the rebounding U.S and global economy. The eurozone economy grew only 0.2% in the first quarter, gaining no speed from the quarter before. Worse, inflation is dangerously low at an annual 0.7%, well under the ECB's goal of a little less than 2%.

A long period of low inflation is a threat, because it makes it harder for heavily indebted governments to cut their borrowings, and increases the pressure on them to keep imposing fiscal austerity in the form of higher taxes and restrained spending, which slow growth further.

Yet economists say the impact of most of the measures that are talked about would likely be a marginal improvement and psychological reassurance, rather than a big bang.

Holger Schmieding, chief economist at Berenberg Bank in London, said the biggest impact may be to show that the ECB is willing and able to act.

Short of a complete surprise, such as a massive program to boost the amount of money in the economy through bond purchases, "what the ECB will do will have only very modest consequences."

At the ECB's last meeting in May, bank President Mario Draghi said the agency was "comfortable taking action next time," at its June 5 policy meeting. Economists are taking him at his word, and so are foreign exchange markets. The euro has fallen 3 full cents since then, and for now has stayed lower, trading below $1.37 Friday in anticipation of an interest rate cut, the most likely move.

The ECB could also offer more cheap credit for banks, perhaps on the condition that they lend it to small businesses. Or it could take the bolder move of starting bond purchases -- an unprecedented step for the bank, but one the U.S. Federal Reserve has taken with arguable success to drive down market interest rates for companies and consumers.

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