More Problems For The Euro?

[youngmafbog]

news.sky.com/story/1276091/ecb-acts-to-halt-euro-deflation-threat

Negative interest rate on deposits. Never heard of in a major central Bank.

They must be worrying.

More moves from the ECB to follow.

[Gromit]

UK inflation is far below what the Bank of England wanted. It is below their estimate, and by being outside the EuroZone appears to be no help to avoid deflation.

Before we scoff at the plight of the Euro we should be careful that we are not following in the same teacks.

[jno]

Japan's had deflation for years, hasn't it? I'm not saying it's done them any good but it's hardly unprecedented.

[youngmafbog]

Not scoffing Gromit, and talking negative deposit rates here not interest rates.

[Old_Geezer]

Unsure I understand this. If by cash they mean physical banknotes and coins then surely all the banks do is keep that in their own vaults and pay nothing to the Central Bank ? (And if it's electronic cash then that takes even less space to store.) How does charging for storage encourage lending ? Lending tends to be figures in the network ether/databases anyway.

[New Judge]

Once again the ECB and its political masters are addressing the symptons rather than the disease.

It's nothing to do with scoffing, though many European politicians may be hearing the words "told you so" ringing in their ears. The problems for the euro are far from over despite what the Euromaniacs would have us believe. All that has been done is a bit of sticking plaster loosely stuck over a gaping wound. If the UK suffers similar problems it will at least have had the option to apply the usual economic remedies of devaluation and interest rate control - remedies not available to those nations using the euro.

Problems of lack of demand and growth in the eurozone (which is leading to deflation) stem in the main from many of the nations being unable to compete because they are using a currency that they simply cannot afford. Some of them racked up huge debts in euros and now cannot repay them. Greece in particular was given far too many euros for its Drachmas on conversion, ran up huge loans, are now stuck with a currency that they cannot control via interest rates and devaluation and an economy that is not growing due to internal devaluation (i.e. they have less cash to splash).

All these problems were highlighted before the euro was launched. Many observers counselled against the single currency because, whilst it might just about work when everything was rosy, if the excrement hit the air conditioning these problems would arise. It was also forecast that if they did they would be extremely difficult, if not impossible to cure.

Currency union without political, economic and fiscal union was always going to be difficult to sustain. As I have said previously, if fifty years time when the euro is long forgotten economists will look back and wonder what on earth possessed seemingly sensible politicians to have embarked on such a scheme when it consigned so many people to penury. The euro was an ill-conceived, badly executed scheme which was driven not by economic necessity (far from it) by politicians' vanity. They believed that it would encourage political union when in fact it has had precisely the opposite effect. The Euromaniacs see it as their second most successful achievement after the free movement of people. I think no more needs to be said.

[ToraToraTora]

There have been negative interest rate in japan before essentially it encourages spending. It's alien concept in the west, basically if you have any savings they charge you for looking after them because with deflation the future value increases rather than decreases. The problem with the Euro is that they put the cart before the horse when they set it up.