ECB move unlikely to offer Europeans much relief

September 6, 2014

 Washington (Sept 6)   For the struggling Spanish shopkeeper or the Portuguese restaurant owner, the European Central Bank (ECB)’s latest economic stimulus plans won’t likely provide much relief anytime soon. If ever.

Confronting a stalled economy and painful unemployment across Europe, the ECB is doing what it can. It surprised economists and investors on Thursday by cutting its benchmark interest rate to a record-low 0.05 per cent. And it announced plans to pump money into the financial system by buying bonds backed by assets such as auto and credit-card loans.

But Europe faces a crushing array of problems — from burdensome regulations to growth-killing budget policies — that analysts say remain beyond the ECB’s powers to fix.

“Monetary policy cannot carry the entire burden of reviving growth in the absence of essential broad-ranging structural reforms,” said Eswar Prasad, professor of trade policy at Cornell University.

Among the businesses and individuals who in theory might benefit eventually from the ECB’s actions, optimism is scarce. In Spain, with its punishing 24.5 per cent unemployment, hope is especially dim.

Pablo Torres, who manages a shoe store in Madrid, said he expects the ECB’s effect “on the real economy will probably be none.”

“In our case,” Torres said, “we are at a standstill, not getting ahead or going backwards, and the only thing that’s helped us stay afloat is tourism.”

In Portugal, Jose Nunes Pereira, who opened a restaurant last month in a Lisbon business district, dismissed the ECB’s rate cut as “totally irrelevant.”

The cut “won’t trickle down to families,” he said. “It’s a measure aimed at big companies, not small ones like mine.”

The ECB hopes to jolt a European economy at risk of sinking into recession for the third time since 2008. In the 18 countries that use the euro currency, unemployment is stuck at a collective 11.5 per cent. (By comparison, the US rate is 6.1 per cent.) For those younger than 25, the eurozone’s rate is 23.2 per cent.

The ECB’s goal is for lower rates to energize borrowing and spending, which would, in turn, encourage employers to hire. Banks and auto companies would lend more to consumers and small businesses if they knew they could package those loans into bonds the ECB would buy.

Companies and consumers who can’t get loans from Europe’s cautious and troubled banks would be able to borrow.

Lower interest rates are also expected to reduce the value of the euro, thereby helping European companies by making their products more affordable in foreign markets. Indeed, the value of the euro fell after the ECB’s announcement to its lowest levels in more than a year.

The ECB is also trying to boost the eurozone’s nearly non-existent inflation. Prices are rising just 0.3 per cent annually, not even close to the ECB’s 2 per cent target.

Ultra-low inflation is unhealthy for an economy. It makes it harder for consumers, companies and countries to repay debt left over from the eurozone debt crisis. And it raises fears of an outright drop in prices — deflation — that tends to stifle economic growth and business profits. That happens because many people and companies delay purchases in anticipation of ever-lower prices.

A related study is "The Ultimate Demise of the Euro  Union"

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