The Next Step by the ECB Should Be Quantitative Easing

On November 7, 2013, the European Central Bank (ECB) lowered their discount rate for the first time in half a year, setting it at 0.25%. The previous discount rate was 0.5%.


This decision was highly unexpected for the expert community, which was certain that the ECB would maintain their discount rate at the previous level. However, lowering the rate was a necessary measure that would have to be taken sooner or later, as long as the economic growth situation in countries in the Euro zone leaves something to be desired. According to the latest predictions of the IMF, economic growth in the European Union countries just may turn out to be zero. In comparison, economic growth overall worldwide will be 2.9%; in the G7 countries, 1.2%.

The basic problem of the euro zone is the high euro exchange rate. Lowering the discount rate means lowering the overall level of interest rates and lowering the attractiveness of the euro as a currency for investment, resulting in lowering the value of the European currency. And as we have already noted, lowering the discount rate entailed a sharp drop in the euro compared to other world currencies, especially to the dollar. Lowering the euro is necessary to improve the competitiveness of European goods, especially in automobile manufacturing, as well as enhancing the attractiveness of the Southern Europe tourism zone.

 

However, the ECB has so far not made the more decisive step - quantitative easing, which would stimulate credit activity and economic growth overall. What's more, such a measure would be a godsend for Southern Europe, as long as the unemployment predictions are highly pessimistic; according to the latest predictions of the IMF, the unemployment level in 2013 for Portugal will be 17.4%, for Spain, 26.9%, for Greece, 27% (by comparison, Germany will be 5.6%).

 

Germany, on the other hand, is putting the brake to the decision for quantitative easing, apprehensive of runaway inflation and a sharp rise in property values, which may create a bubble in its wake. It may be suggested that Germany will be forced to take this step all the same, when European banks are faced with worsening financial stability in 2-3 months.

 

Overall, an undesirable situation is taking shape in the euro zone banking system, attested to by low credit activity, growth in governmental debt and the threat of increasing yield on governmental bonds in the midst of lowering country ratings.

 

A.L. Vedev - director, Center for structural research