Mario Draghi, in his last act as European Central Bank MFWIC, has lowered ECB benchmark interest rates and set the central bank on a long-term campaign of bond-buying. His…idea…is to stimulate inflation and push the inflation rate to more normal levels.
Couple things about this. The Wall Street Journal thinks this commits Draghi’s successor to this foolishness for the long term. Of course, it does not. His successor can undo this business when he takes office. The difficulty will be solely within that successor’s political courage.
The larger problem though, is this. Interest rates are inherently inflationary. While lowering the cost of money—especially to the point of negative interest rates—encourages borrowing and spending the borrowed money, it does little to nothing to inflation. This is the case especially for a polity as dependent on international trade—whether within the EU or with nations outside the EU—as is the EU and its member nations.
Lower interest rates devalue the euro relative to non-EU nations, which drives up the cost of importing goods and services necessary to domestic production and sales. Domestic prices won’t rise as much, even with the increased demand represented by the spending increases encouraged the lower (domestic) cost of money.
The ECB’s pre-emptive move was aimed at insulating the eurozone’s wobbling economy from a global slowdown and trade tensions.
The move won’t work any better today than similar moves have the last several years. Just as would be optimal in the US, if the ECB wants a stable, healthy, growing economy in the EU, it needs to set its benchmark interest rates at levels historically consistent with the inflation rate that has been optimal for the EU economy, and then sit down and be quiet.
Unfortunately, European bureaucrats and politicians are even more addicted to doing something than are our own.
Especially when the best something to do is nothing.