No more negative interest rates
The Eurozone made history when they cut interest rate till it went below zero in 2014. One reason was to spur growth and another one was more pressing, which was to resolve the sovereign debt crisis for some of the member countries.
No one knew what to expect since there was no precedence. But the debt issue did get attenuated and GDP growth was stabilizing around 1-2% in subsequent years. It kind of worked but more like slapping on a band aid.
Today, the same problems have came back to haunt Eurozone again - struggling economy and sovereign debt issues unresolved.
But this time is different. Eurozone can no longer cut rates anymore because inflation has been rising.
It doesn't help when US is raising interest rate and causing the US Dollar to strengthen. Commodities are priced in USD and that worsens the inflation problem for everyone around the world.
EUR went to parity with USD at one point, a two decade low. The Europeans get hurt more than the Americans.
Coupled with the threat from Russia, who shut down the natural gas supply temporarily on the pretext of maintenance has caused energy prices to rocket in Europe.
Now we know why Russia has the audacity to invade Ukraine while European countries could only condemn the Russian attack or impose selective sanctions. Moral high ground sounds nice on TV but it cannot keep the lights on. They were at the mercy of Russia.
Taming inflation has taken precedence over economic growth. European Central Bank (ECB) raised the rates by 0.5% and now interest rate is back at zero. This is still conservative considering US raised a few rounds already and the latest was a 0.75% climb.
Hence EUR will continue to be weak against the USD. But EUR is trying to keep up and more rate hikes should be expected. But I don't think it will raise as fast as the US.
This is because it will present another problem - the sovereign debt crisis which was kept under control for years could unravel as the increase in interest rate and low economic growth would make poorer European countries unable to repay their debts, again.
Basically the old problems in Eurozone were not solved and now they are burdened with more problems and with less policy maneuvering space. We are probably going to hear more bad news coming from Europe.
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Nice article
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