Going Negative?

Is Europe headed for negative interest rates?

The Euro-zone has been in recession since mid-2011. Their recovery from the Financial Crisis of ’08 and ’09 was tepid, and the currency crisis over there has severely damaged business and consumer confidence.

So ECB President Draghi is considering setting negative interest rates on bank reserves—charging banks for the privilege of stashing cash with the central repository. There’s precedent for such an action: Switzerland and Sweden have had such a policy in the past, and Denmark cut its deposit rate below zero in July of last year.

Negative rates are usually the response of a small economy to large capital in-flows—they discourage speculation. But they’ve never been used as a policy by in a major economic power. Nevertheless, when these smaller countries implemented them, they didn’t lead to major catastrophes. After all, we’ve had negative real interest rates over here for years. Negative nominal rates would be an annoyance, not an apocalypse.

But negative rates would be a distraction from Europe’s real problem—a disharmonious banking system and an anti-competitive labor market. Until they address those issues, Europe’s economy will hobbled.

Douglas R. Tengdin, CFA

Chief Investment Officer

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