Euopean Central Bank Removes Risk Of Global Crisis

The turmoil in Europe appears to have died down, at least for now. Interest rates have fallen except for Spain. European Central Bank officials say they have contained the crisis — even if a recession occurs. But not everyone is so sure, and the recent rise in interest rates in Spain is making some investors nervous.

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The financial turmoil in Europe has died down, for now. Interest rates have fallen from the highs they reached last November. As the European Central Bank, officials believe they have contained the crisis. But investors still get nervous when they see a sign of trouble, like the recent rise of interest rates in Spain. NPR's Jim Zarroli reports from Frankfurt.

JIM ZARROLI, BYLINE: Only a few months ago it seemed as if Europe would collapse under the weight of its own debt, dragging down the rest of the world's economies with it.

VITOR CONSTANCIO: The markets were stressful, fears were in the air, and our operations eliminated that risk from the table.

ZARROLI: That is Vítor Constancio, vice president of the European Central Bank, sitting at his conference table in his office high above Frankfurt. The ECB is something like the Federal Reserve, but with fewer powers and a narrower mandate. For a long time it was criticized for taking a passive approach to the financial crisis. But Ester Faia, professor of economics at Goethe University, says, like other central banks, it has finally gotten a grip on the crisis.

ESTER FAIA: The policymakers throughout the world have been much more flexible and activist. And this is good. I mean, it's definitely the right response when there is a panic.

ZARROLI: The ECB has done this in several ways.

PETER TATENBERGER: This one.

ZARROLI: Real estate agent Peter Tatenberger(ph) opens an apartment door in the north end of Frankfurt. The ECB has brought interest rates way down, and in some cities in Germany prices of homes like this one have risen as much as 20 percent in less than two years.

TATENBERGER: It's very hot. The house we are standing in, everything is sold. But if I had a house like this with - I think it has six apartments - on the market, I think it would be sold within two weeks.

ZARROLI: In that regard, Germany is something of an outlier. Most other European countries are seeing flat or falling house prices. But just as in the United States, the low interest rates are giving a level of support to real estate prices.

More significantly, the ECB has lent more than a trillion euros to its banks, in what are called long term refinancing operations. Constancio says many banks suffered from severe liquidity constraints at the beginning of the year. With credit markets stalled, they couldn't borrow the money they needed to keep operating, now, as a result of the ECB's moves, many are able to sell bonds and lend money.

CONSTANCIO: All that are signs and results and effects of our operations, of providing liquidity to the banks.

ZARROLI: But Constancio acknowledges that the ECB still faces challenges and pitfalls. With elections coming up in countries such as France and Greece, the tough austerity measures advocated by European officials will face a new political test. Last month, Spain's interest rates spiked after the new prime minister talked about making unilateral changes in its austerity program. Constancio says he doesn't believe Spain will renege on its promises.

CONSTANCIO: It's a commitment that has been taken by the country and we certainly expect that the country will respect that agreement.

ZARROLI: Europe also is widely expected to be headed for a recession. As incomes fall, there is the risk that many banks will be unable to borrow the money they need. That could mean another long term refinancing operation. Constancio doesn't want to address whether such a move is likely, but he does suggest that it isn't needed right now.

CONSTANCIO: Well, the size of our LTROs have been sizeable enough, I would say. And so banks have really liquidity situation, which is now, I would say, comfortable.

ZARROLI: Like the Fed, the ECB has navigated the financial crisis so far, but each week seems to bring another potential disaster. And that means no one at the ECB or elsewhere can afford to take a bow yet.

Jim Zarroli, NPR News, Frankfurt.

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