Some will argue that the ECB's head has been so deep in the
sand refusing to reduce interest rates when needed that for some
member economies the game is all but over. What is happening now is
too little and to late in many people's eyes and the European
Banking sector needs a total overhaul, which would mean an awful
lot of pain before any hope of gain and that is something very few
politicians have the stomach for.
Admittedly the ECB has very few tools with which to fix the
economy and it's recent decision to lower interest rates to an
historic low of 0.25% has left the tool bag lighter than ever. The
only option now is to reduce the benchmark interest rate to zero or
even into negative rates to stimulate lending which is a
possibility some market commentators are speculating over. The
preliminary inflation reading for October fell to 0.7%, which is
the lowest level in the 17-country currency area for four years,
and down from 1.1% in September and well below the target of just
Whichever way you look at this it is not a good place to be
especially as the European Banks that are soaking up this cheap
money from the ECB's Long Term Refinancing Operations (LTRO)
are preferring to hang on to it instead of passing it on to
businesses in the real economy that desperately need it. If the ECB
cuts rates into negative territory with the plan of penalising bank
holdings in order to stimulate lending then, banks may simply repay
their LTRO borrowings quickly rather than the riskier option of
lending to companies where there may be a chance of default.
I'm no economist but It seems clear to me (and as we know
hindsight is a wonderful thing) that taking the bitter banking
reform pill early in the piece would have been the best medicine.
However, the situation is now close to desperate and whilst
politicians tell us that the patient is getting better the chart at
the end of the bed says the patient's arteries are all but
blocked and he is on life support. Without political and fiscal
union the 17-country Euro zone looks set to have a near death
experience soon or maybe even worse.
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