The European Central Bank unexpectedly lowered all its interest rates to fresh record lows and took its rate on bank deposits further into negative territory, in an effort to keep ultralow inflation rates from undermining the eurozone’s fragile recovery.
The Bundesbank promptly responded that the rate cuts will have a “negligible” impact, and the BUBA is almost certainly right about that as well. No matter how low a rate, borrowing makes no sense if there is little underlying demand for a businessman’s product. Nor does it makes sense for a consumer with a stagnant income and tenuous employment prospects to take on yet more debt.
Which is why Draghi ventured into the realm of fiscal policy last week at Jackson Hole. He knows that at a basic level, spending=income and if the private sector isn’t yet ready to do the spending (because it is repairing its collective balance sheets), then this has to be undertaken by the government.…
In addition, I think that the expectation is that a lower interest rate will effectively devalue the euro somewhat, thereby stimulating external demand from outside the EZ. So the plan is still to use the external sector as an offset rather than fiscal policy. This is a reason that Germany is applauding a weakening of the euro, being an export-driven economy that can no longer rely on the EZ to import its products due to austerity. Macrobits by Marshall Auerback
Draghi Surprises With Rate Cuts; Will It Matter? Marshall Auerback