The European Central Bank (ECB) was forced to admit through its actions that the economies of the member countries of the Eurozone – those which use the euro – are in serious trouble.
The problem is so acute that it has revived discussions about the structural weaknesses of the Eurozone and its ability to survive.
So the ECB’s President, Mario Draghi announced that he reduced the short-term lending rate to banks from 0.15 percent from to 0.05 percent. In addition, the ECB changed its deposit rate—the rate it gives banks that deposit cash with it for safekeeping—to negative 0.2 per cent from 0.1 per cent.
The reason he took these actions was to push banks to lend more money, because one of the most serious problems of the economy is the lack of liquidity in the markets.
Moreover several analysts argue that the ECB is deliberately undermining the value of the euro to boost the competitiveness of European products, thus also strengthening the economy.
For example, the price of a barrel of feta cheese was at one level when the euro was $1.50 and is at another now that the euro has dropped to $1.29, its lowest point in the last 14 months.
Of course, on the other hand, imported products, for example, in Greece, will be more expensive than before. With regard to luxury products, this may not be of much importance, since the consumer can live without it.
What happens, however, with petroleum products?
The cheap dollar has been used by the United States as tool to increase exports, which has had a positive impact on economic growth and has helped reduce unemployment after the economic crisis of 2008.
But now that the Eurozone can no longer withstand the economic pressure, it is counter-attacking.
The ongoing devaluation of the euro is a very positive development for Greece as it can expect an increase in exports to the USA plus attract more tourists from the USA!
However, by itself the ECB cannot solve all of Europe’s problems, just as the Fed cannot eliminate all the economic problems of the USA.
It is high time for the Europeans to relax deficit targets as a percentage of their nations’ GDP.
Certainly Germany continues to react negatively to this. And this despite the fact that not only France and Italy, but Germany itself is facing the same problems.
And despite the fact that the tensions between EU countries are taking on the dimensions of a “civil war.”