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Time to choose your model

When Wim Duisenberg announced a 50 basis point cut in the European Central Bank refinancing rate from 3% to 2.5% on April 8, he made every effort to pre-empt speculation about more such cuts for the foreseeable future. Throughout its first three months of operation, the ECB has had to endure endless pressure from European politicians and private-sector economists to cut interest rates. Having frustrated this critical audience by keeping rates stable in the face of sharply declining business confidence in the three largest economies in euroland ­ Germany, Italy and France ­ Duisenberg now surprised the markets with one swift, deep cut. And his message was: "This is it." Don't expect any more cuts in the near to medium term.

Duisenberg was quite explicit in passing the buck for re-energizing Europe and tackling its unemployment problems back to the continent's political leaders, pronouncing at the press conference on the day of the rate cut: "The solution to that problem has to be found in measures in the labour and in the goods markets and we do hope that taking the monetary policy stance we have done today will in the ensuing months increasingly focus the attention of policymakers and the public on the real causes of the unemployment problem, because it will demonstrably become clear that monetary policy is not the answer to solve those problems."

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