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Interest Rates in Europe into Uncharted Territory

by Andrew White  |  June 9, 2014  |  5 Comments

Did you notice that last week the ECB actually lowered a key interest rate to negative?  This is a first for us all.

The ECB thinks that by charging European banks to deposit their excess cash with it, those banks will instead be inclined to withdraw the money and lend to business, especially in the south of Europe where economic malaise is rife.  Since the previous interest rate was zero, why those banks won’t just park their money in their own vaults is beyond me.

The main reasons why European banks are not lending to business are not tied to interest rates. They are centered more on the following:

  1. Continued criticism from the IMF and bank regulators that banks do not have enough reserves to survive economic turmoil
  2. Continuous threat of increased and complex regulation that may curtail profitable banking operations
  3. General malaise experienced in the market and economy as a whole in the Euro area as a result of new but ineffectual economic policies

As it stands, and this was nicely captured in the US weekend print edition of the Wall Street Journal (see Germans Lambaste Euro Zone’s Rate Cut), savers in Germany are being dinged to save the south:

“The underplaying message was that German savers were being penalized to save a European currency zone that had been undermined by less fiscally prudent countries in the south.”

The basic trade imbalance between the north (i.e. export and production centric) and the south (i.e. import and consumption centric) remains in place.  Until it changes, the pressures can only go in one direction.  A single, unitary exchange and interest rate (what the Euro brings) will simply keep the pressure up.  It’s a bit like a pressure cooker on the stove.  Eventually the little spigot on the top “blows” and the pressure is released.

In today’s US print edition of the Financial Times there was a Comment piece from Wolfgang Munchau on the topic, called, “Europe’s drifters wait but inflation never comes“.  Wolfgang puts a humerus tone to the attempt by the ECB to use tools that have yet to work, anywhere.  The negative interest rates have been tried before (Norway), but didn’t do what was expected.

Note that the US and UK central banks are talking of rate rises and timing, whereas the ECB is going in the opposite direction

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Category: economic-growth  economy  euro  

Andrew White
Research VP
8 years at Gartner
22 years IT industry

Andrew White is a Distinguished Analyst and VP. His roles include Chief of Research and Content Lead for Data and Analytics. His main research focus is data and analytics strategy, platforms, and governance. Read Full Bio

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