Lew Has to Admit Europe's Latest Banking Moves Eased U.S. Concerns

NEW YORK (TheStreet) -- Treasury Secretary Jack Lew breathed a sigh of relief last week when the European Central Bank issued unprecedented policy to combat growing deflation concerns in the European region.

Lew, answering questions at the Economic Club of New York from Macy's (M) CEO Terry Lundgren and Stern School of Business Dean Peter Blair Henry, said the features of the ECB's changes highlighted some of the Obama administration's concerns about the European recovery.

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The Treasury Secretary said he was pleased with the ECB's recent decision to encourage banks to lend to small- and medium-sized private enterprises, a sector he says has lagged the United States since the end of the Great Recession.

The ECB on June 5 announced its intention to cut its key refinancing rate to 0.15% from 0.25% and set negative deposit rates, which would require private banks to pay the central bank to hold reserves. They also started a lending program targeted at banks that would lend to the private sector, and began preparing for future asset-backed security purchases, which would be similar to the Federal Reserve's actions since the 2008 financial crisis.

"What Europe is doing, economically, has a big effect on U.S. stocks," Wells Fargo Advisors chief equity strategist Scott Wren, said in an interview. "So the better the European economy is doing, the more money our companies are going to make."

These policy changes come as disinflation has continued across many European nations -- a signal that the eurozone economy could be headed for deflation without extraordinary action.

Economists argue that the main function of central banks is to control inflation -- keeping it from going too high or turning into deflation. The Fed's and ECB's key tool to control inflation is setting interest rates, but as the global economic registered its worst pullback since the Great Recession, near-zero interest rates weren't enough to soften the impact. The Fed acted with a quantitative easing program, which included purchases agency-held asset-backed securities to help stimulate the financial sector.

Europe, though, opted for a tighter monetary policy as a handful of country members -- notably Greece, Italy, Portugal, Spain and Ireland -- would need more significant accommodation than others. Simply, a nation like Germany wasn't willing to help pay down the debts of a nation like Greece without meeting demands that would force them to reducing spending.

The result was an economic recovery in the United States with a near 3% annual growth rate, but stagnant to negative growth in the eurozone.

Lew said he doesn't know how effective the ECB's move will be, but said he will continue to encourage their decisions in the recovery.

So while it seems like the Treasury Secretary is happy to see new ECB action, it comes years after the Obama administration and the Fed wanted the eurozone to take a more accomdative approach in an effort to bolster a stronger global recovery.


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-- Written by Joe Deaux in New York.

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