The President of the ECB, Mario Draghi has high hopes for gradual
recovery for the bank by cutting interest rates. As we talked about in class,
interest rates in some cases can be good, but others bad. Low interest rates can be good in
situations such as home buyers and borrowers, but not often for others. Those
trying to make interest on their savings will continue to struggle. Central
Banks in many developed nations are engaged in an “easy money” policy. When
interest rates start to rise in countries, it is a good sign because it indicates
that business loans are in higher demand. This is not the case in Europe and instead
interest rates are being cut and inflation is still an issue. “Three months ago they had expected the euro-zone economy
to shrink by 0.3% this year and to grow by 1.2% in 2014. Now they are
forecasting a contraction of 0.5% in 2013 and growth of only 1% next year”.
It is impossible for central banks anywhere to always have stable
targets without paying attention to the activities of banks and other
agreements. These activities can be
affected by a various central bank policies that redistribute the monetary
across the different economic sectors.
Today, the main problem facing the European Central Bank (ECB) is “that
the improvement financial markets over the past six months has not helped firms
in southern Europe”. It is important
that instead the ECB keep moving instead of remaining on hold. If businesses
are not borrowing money and banks are not lending, the flow of money will be
less and more money will be printed causing greater inflation. Europe needs to
develop a better strategy for growth such as changing incentives on loans.
What should the ECB do? Not set their expectations so high? While
raising interest rates may not seem like a good short term goal it is important
to find an alternative solution sooner than later.
article source: http://www.economist.com/blogs/freeexchange/2013/03/central-banks-europe
I agree that Europe needs to change it's incentives on loans in order to achieve growth and as a I researched more into the subject I found an article discussing the EU'S plan to aid in loan alteration, titled " EU Plans Incentives for New Greek Leaders". In the article it highlights how European officials are preparing to dangle a package of incentives in front of a new Greek government to convince it to stick to the country’s current bailout deal.The package would include further reductions in interest rates and extended repayment periods for bailout loans, as well as EU money to spur investments in Greek public works programmes through the European Investment Bank. This all sounds good in theory but who knows if if will actually all follow through.
ReplyDeleteI think it will take a long time for the Euro zone to recover and get back on a solid growth path. Lower interest rates and a lower Euro should help. However, financial engineering can only go so far. I think the root-cause is a collective mind-set. It is that mind set that got them where they are today. It is how a person thinks that makes all the difference - the same thing for everyone else on the planet - good, bad or sideways, your thinking, and understanding of the true nature of things – of reality - will drive your successes and failures.
ReplyDeleteHow do the Europeans see reality? Do they seek opportunity or do they expect entitlement? Are they trying to produce more with less or expect more for less? I say knowledge of the truth, acknowledging reality and solid leadership is the key to growth. What is “truth”? True is “what works”. Truth is “what produces positive results”. It’s called savings and investment, innovation and entrepreneurship. With the free flow of goods, capital and information, i.e., a flat world, the winners will be the few who understand and acknowledge this reality first and get to work producing results! The name of the game is… and has always been…savings, investment and the efficient and effective use of scarce resources - better, faster cheaper!
The Reality Theory
“reality isn't the way you wish things to be, nor the way they appear to be, but the way they actually are. Either you acknowledge reality and use it to your benefit, or it will automatically work against you.
~ Robert J. Ringer
The entitlement mentality always takes a long time to change. Change will come however, as truth, reality, the market, is always right in the long run. The winners will be the innovators who get over their entitlement mentality, and use their limited resources in the most effective way possible.
I think the ECB did the only thing it probably could of done. It had to keep an interest rate low so as to encourage investment and further consumption. Raising the interest rate would take away the incentive to invest in markets and would cause people to save rather than spend their money. On the other hand further lowering the interest rate is incredibly risky.
ReplyDeleteItaly seems to be at the forefront of the ECB's decision with its recent elections. Italy is Europe's third largest economy and with little prospects of having a reform minded government, the bond-buying safety net the ECB put together last year is weakened, leaving a greater possibility of another euro zone crisis.
The point is that there is only so much the ECB can do. In order for there to be real progress there has to be government reforms. What seems to be inaction by the ECB is its attempt to push governments into reforming. “ECB inaction keeps the pressure on governments to continue structural reforms to improve growth prospects,” said Christian Schulz of Berenberg Bank. These reforms could boost growth and and reduce unemployment.
Usually I think that exchange rates, interest rates, and inflation are rather intuitive to anticipate their consequences. With the EU being a fairly new trade-currency block, yet, with such varying economies in size and faculty, it will be interesting to see if the European ministry of finance will continue to use tried and true reductionist methods (either the interest rate, or unemployment), or if they will continue to notice an (negative) error in their predictions, and maybe then will resort to a new approach.
ReplyDeleteBeing that the EU has a large block of countries that are leading in world economies, and conversely has multiple failing economies (PIGS), I think that a successful EU with a holistically thriving economy could serve as a model for a potential currency block with the NAFTA countries. Wouldn't that make trade in the U.S. look a little different?!
In response to Kayla, I agree that Greece needs help but i fear extensions wil only serve as a means for debt accumulation. the problem seems to be more inherent of the eurozone and stems from the common currency and the troubles with melding northeastern and southern european economies. An article by CNN entitled, "Eurozone crisis explained" states that although Greece was experiencing economic roblems prior to entering the eurozone, they are able to borrow excessively and conceal it. "as successive governments sough to meet the 3% of GDP cap on borrowing that is required of members of the euro". That is why is seems more pertinent to focus on adjustments in eurozone economic policies instead of just providing another extension, which at this point will only serve as time for more debt extension.
ReplyDeleteI really appreciate the delineation between the situations when interest rates are good and when they are not so beneficial at the beginning of the blog post. Anyhow, I do think that lower interest rates in the Euro Zone have been the only way to respond to the financial issues. The continued lowering of interest rates, however, doesnt seem to be a good option.I do agree, the ECB needs to "move", to avoid printing more money and avoid inflation. Though, I do not think higher interest rates will be a long term solution, maybe it would encourage growth especially in the southern European areas!
ReplyDelete