- Obama military strategy too weak for future security, panel reports
- Sen. Tom Coburn vows to slow down budget-busting bills ahead of recess
- Obama fantasizes about more executive power, signs new order on federal contractors
- Clintons call Klein, Halper, Kessler ‘a Hat Trick of despicable actors’: report
- Boehner accuses Obama of ‘legacy of lawlessness’
- Pro-marijuana group claims responsibility for Brooklyn Bridge flag swap
- Young adults shun Obamacare mostly due to cost: survey
- Stabbing attack on transgender girl, 15, was ‘bias motivated,’ police say
- LGBT adults still lean overwhelmingly toward Democratic Party
- Lawmakers rattled by Syria genocide horrors, call on Obama to act
EDITORIAL: Europe goes negative on interest rates
Paying people to borrow money is the latest innovation in banking
Question of the Day
Europe’s economic policies have often seemed a bit daft to us, setting the Continent on a course to bankruptcy. Things got stranger still last week when the European Central Bank turned the entire concept of interest rates on its head. The centralized bureaucracy decided it would be a good idea to pay people to borrow money.
Under this scheme, it would make far more sense for investors to stuff their cash in a mattress than to put it in a savings account, which is hardly a way to encourage the sort of investment needed for economic growth. Yet this is what happens when the deposit rate for banks drops from 0 percent to negative 0.1 percent, and it may lay the groundwork for another financial crisis.
European regulators made the extraordinary decision to cut interest rates below zero out of terror that the inflation rate’s decline from 0.7 percent to 0.5 percent presages runaway deflation. Just as worrisome are the reports showing a paltry economic-growth rate of 0.2 percent. That number only inched into positive territory on the strength of the German economy, while economies of the rest of the European Union contracted.
“Are we finished?” asks Mario Draghi, the central bank’s president. “The answer is no … If required, we will act swiftly with further monetary-policy easing. The Governing Council is unanimous in its commitment to using unconventional instruments within its mandate should it become necessary to further address risks of prolonged low inflation.”
Institutional constraints keep the European Central Bank from adopting the usual policy of the U.S. Federal Reserve or the Bank of England, to print more money through “quantitative easing.” Germany, which runs a tight economic ship, can keep Europe’s central bank from engaging in such tomfoolery, though the scheme to pump up the money supply is held in reserve as an option for the future.
Even the supporters of the European Central Bank’s latest scheme concede that the change in interest rates is not likely to accomplish very much. Europe’s financial problems aren’t the result of a cash crunch. The banks have plenty of cash. Encouraging borrowing by paying for it creates an entirely new, and likely more significant, set of problems.
It will cost banks almost nothing to borrow, meaning they have little incentive to screen for riskiness when making loans. This ought to sound familiar, since it was one of the primary causes of the “toxic assets” that brought about the global financial collapse only a few years ago.
On the other side of the equation, it’s not clear that the private sector is demanding new credit. There has been no serious attempt at regulatory or entitlement reform in the European Union. The government sectors remain as big and bold as ever. Tax burdens have not declined, and licensing and other bureaucratic hurdles have not eased. Entrepreneurs cannot thrive, and their business ventures cannot flourish, in such an inhospitable environment.
The only “solutions” the Eurocrats can offer are smoke-and-mirror tricks. Cutting interest rates into negative territory is a stopgap measure that delays the inevitable. With all of Europe’s very real problems unaddressed, fiddling with monetary variables cannot deliver the growth the Continent desperately needs.
In Europe, as in the United States, printing money and “going negative” only digs national economies into a deeper hole. The only way out is through hard decisions — standing up to entrenched bureaucracy, lobbyists and special interests seeking breaks and favors.
Growth will come when governments stop consuming so much of their production and businesses have the room they need to expand and provide jobs. This is called common sense, and Europe never has enough of it.
About the Author
- 'Standing by Israel' special report
- LETTER TO THE EDITOR: Ventura's court win is really a loss
- LETTER TO THE EDITOR: Ukraine is not so easily understood
- LETTER TO THE EDITOR: Reagan didn't deregulate airlines
- LETTER TO THE EDITOR: Don't fund irrelevant 'highway' projects
Latest Blog Entries
TWT Video Picks
By Ted Cruz
Israel saves its enemies; Hamas endangers its friends
Get Breaking Alerts
- Inside the Ring: Israel surprised by Hamas tunnel network
- Army's 3-D printed bombs to create 'a whole new universe' of lethal capabilities
- Chicken pox outbreak puts illegal immigrant facility on lockdown
- GOP leaders delay border bill, leave Obama in control
- Report: 40% of weapons sent to Afghanistan are unaccounted for
- CIA admits improperly hacking Senate computers in search of Bush-era information
- CRUZ: A tale of two hospitals: One in Israel, one in Gaza
- Lois Lerner hated conservatives, new emails show
- Catholic League slams Obama: 'Do Christian lives mean so little to you?'
- U.S. troops told not to eat, drink in front of Muslims during Ramadan