EU economy could suffer the same fate as Japan
- By Jiang Shixue
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E-mail China.org.cn, September 15, 2014
On Sept. 4, 2014, the ECB took another bold step. These rates were cut to 0.05 percent, 0.30 percent and minus 0.20 percent respectively, and it was stated that the lower limit had been reached. Benoît Cœuré, member of the Executive Board of the ECB, said, "With these measures, we entered practically uncharted territory."
The ECB is the first major central bank to introduce negative interest rates, but will the policy tool be effective in stimulating the EU economy?
While some economists note that a negative interest rate is not a guarantee of providing the massive impulse needed for stronger recovery, many others believe that the ECB's action will bolster liquidity and loans to businesses by persuading commercial banks to borrow more funds.
Interestingly, in Germany where economic growth is far higher than the rest of the other EU members, there is widespread aversion to low interest rates. Many Germans argue that the ECB's mandate is to ensure price stability by aiming for an inflation rate of below 2 percent over the medium term.
Everybody knows that the central banks of the United States, Britain and Japan have applied quantitative easing (QE) to create money to buy financial assets to fight against deflation, with varying degrees of success. Why is the ECB refusing to adopt QE? One of the major reasons, as the Economist (Aug. 2, 2014, p. 58.) suggested, is that banks rather than markets dominate the provision of credit in the Eurozone.
According to economics text books, there are three engines of growth in any economy; investment, consumption and exports. Therefore, we should not forget the importance of expanding EU exports.
China's offer to help the EU after the debt crisis broke out is still fresh in everybody's minds. China purchased bonds from Greece, Spain and Italy, increased investment in the EU, imported more products from EU countries, and even agreed to offer more resources to the IMF, which was part of the "Troika," bailing out Greece, Portugal and Ireland, along the European Commission and the ECB. Now China and other emerging economies can also help the EU to speed up its economic recovery.
Finally, it is important to point out that for the time being, although the EU economy seems to be faced with the danger of going the same way as the Japanese economy, in the longer run, its growth prospects should be positive. We should not underestimate the EU's solid economic foundation, its strong competitiveness on the world economic stage and its capacity to produce and export.
The EU's economy will rise from the ashes.
The author is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/jiangshixue.htm
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