At last, the European Central Bank seems ready to inject some adrenalin into the moribund euro zone economy. After last week’s news conference, when European Central Bank President Mario Draghi strongly hinted that action would take place after the June 5 council meeting, there have been a host of interviews and leaks specifically describing the new ideas the bank has in mind.
The biggest measure, now almost a foregone conclusion, will be a cut in the interest rate the ECB pays on bank deposits from zero to negative 0.1 or 0.2 percent. Bank officials have also hinted at several additional stimulus measures: extension of loans to commercial banks at low fixed rates for three years or even five years; ECB purchases of bank loans to small and medium enterprises, packaged into asset-backed securities; and concessional lending to European banks on condition they pass on these funds to small and medium businesses.
The leaks generated a great deal of enthusiasm this week. The euro weakened from almost $1.40 to $1.37; bond yields in Italy and Spain fell to record lows; and European stock markets jumped 1 percent to 2 percent. Wednesday, the market reaction crossed the Atlantic, with interest rates on U.S. Treasury bonds falling to their lowest levels in six months.
Sadly, however, investors may be overexcited. Even assuming that all the reports about ECB plans turn out to be true, the bank failed to follow through on similar rumors several times recently. It is also far from clear that these policies would address the big economic problems facing the euro zone: feeble economic growth and widespread unemployment; a continuing credit crunch for small and medium enterprises in Southern Europe; vast imbalances in competitiveness between Germany and the rest of the euro zone, and deflationary pressures that create debt traps and balance-sheet recessions in the peripheral economies.
A negative interest rate on deposits, the measure that has been suggested most strongly, is unlikely to have much effect for two reasons.