On Thursday the European Central Bank cut its main interest
rate from .75% to .5%. This came after new signs of weakness emerge from the Euro
zone. In theory, this new cut to the main interest rate is done to encourage
economic activity. Lower interest rates decrease the cost of debt. It also
helps boosts the demand of debt which is then used to buy goods. It also
depreciates the Euro making the Euro zone a competitive place for exports but
expensive for imports. The problem with this policy relates to the expected
effects it will have in the market. The Euro zone maybe unified by one currency
but is experiencing big economic differences among the core countries of the
north and the economically weak countries of the south.
Germany the powerhouse of Europe has expressed its concern
of low interest rates and its effect on investments that are not economical
over the long term. An example which helps depict the huge differences between
the North and South is the unemployment rate. Germany is facing a much lower unemployment rate of 5.4% compared to Spain’s 26.7%. The continued use of loose monetary
policy that the ECB continues to uphold can in the long run increase inflation
and cause an increase likelihood of new unforeseen bubbles like the housing
bubble of the United States. This is not the only fear. Lower interest rates in
the Euro zone harms savers by decreasing the interest rates they can get for
their savings. The European Central Bank understands that it needs robust
economic growth in all areas of the Euro zone and has done the only thing it
can do currently, and that is to decrease the main interest rate. Economic disparities
between the North and South will continue. Can a better banking union fix this
problem or is this just the beginning of the end for the European Central Bank?
This comment has been removed by the author.
ReplyDeleteThis is an interesting last post Ernest. Cutting interest rates does harm those who are trying to save money because they are trying to benefit from higher interest rates. It also could potentially benefit those who want/need to borrow money without a heavy burden of debt from higher interest rates. We can put this in the factor model of those with capital desire higher interest rates and low inflation, while those in labor prefer lower interest rates to combat unemployment. Right v. left on the political spectrum.
ReplyDeleteI think that at this point in time the ECB needs to be solely focused on the issue of job creation in nations like Spain, Ireland, Greece etc. Lowering interest rates is a great way to incentivize loans for things such as business creation. However, no one in Spain is going to give a damn about lower interest rates. If Germany and other strong economic power within the EU want to keep Spain, Greece, Portugal and Ireland then they are going to have to take concrete steps to improve their job markets. For instance, the ECB should target investment into these states, aiding the development of industries that can provide proper employment.
ReplyDeleteThis move to cut interest rates seems like a good move. The last thing the EU needs is more austerity and less easy money. Certainly there are some inflationary dangers. But, in the short run, the ECB really should use the power of the press to get the economy moving again. I applaud their move to keep interest rates lower.
ReplyDeleteI agree, the move to cut interest rates does seem like a good idea. These countries need to crack down and as Chris said "less of easy money". This austerity that is sweeping Europe is not doing the countries any good and there needs to be growth through job creation and after that to stimulate the economy through consumers. And as Ernest said one potential problem for some core nations like Germany is the Euro will depreciate and their exports will become cheaper and imports higher...Hell! well if it makes the euro depreciate and their exports become cheaper I might just buy a BMW.
ReplyDeleteI agree with everyone here, job creation is central to the issue. However, it's almost a catch-22 in either scenario when considering austerity measures or increasing government spending, in which job creation will suffer in both cases.
ReplyDeleteI found a very interesting blog post criticizing the ECB's efforts to cut interest rates. Although I believe cutting interest rate seems like a good plan, this guy has an interesting take.
ReplyDeletehttp://www.americanthinker.com/blog/2013/05/cutting_interest_rates_again_wont_dig_europe_out_of_recession.html
It seems like a last ditch effort to try and kick start the economy again.It will definitely help and may be the one final piece of the puzzle that the EU needs right now. At a time where unemployment is at a staggering 27% in both Spain and Greece it is one of the only options available to try and fix things.
ReplyDeleteAll of know that cutting interest rate in the short run does help countries recover from short economy. It will help consumer ease it's way to buy cars, buy home, refinance mortgages. Consumer will also be spending less on interest cost and not only that it does help farmers, and business to borrow more money at the bank. However as Benjamin mentioned above that we need to focus on job creation and job growth and hopefully increase in job pay. One of the way to boost economy would be increase in salary otherwise all the prices are going up right now as far as food, gas, real estate not so much but generally speaking it is. In the long run just cutting down interest rate won't be feasible because how low can we keep the interest rate low? Also if interest rate remains low and people who have money are not investing in savings acct, cps, or other investment portfolios then in the long run it is not good for economy.
ReplyDelete