“Whatever it takes.”
That’s the mantra of Mario Draghi and the European Central Bank (ECB) as they slashed interest rates yet further into negative territory on Thursday. The ECB cut the base rate to -0.5% and unleashed another aggressive bond-buying program (€20 billion) in a bid to stimulate the eurozone economy.
But as the eurozone teeters towards recession, it’s time to admit that the ECB has run out of ammo. Draghi has gone down shooting and there’s nothing left in the barrel.
The threats to the eurozone are numerous. The bloc’s largest economy, Germany, is on the brink of recession, partly driven by a monster slump in the nation’s illustrious auto industry. The Macroeconomic Policy Institute (IMK) puts Germany’s risk at 60% right now.
Brexit uncertainty continues to wreak havoc on the economies of Britain and the wider EU itself. Manufacturing and investment demand has weakened and the country only narrowly avoided a technical recession this month.
Italy, the eurozone’s third-largest economy, has seen zero growth for twenty years. It carries an insurmountable deficit, its banks are at crisis point, and the political tension remains on a knife edge.
A recent study by Singapore Management University predicts the entire eurozone will fall into recession by 2022. Meanwhile, the euro is at the heart of a global currency crisis.
The ECB has an aggressive mandate to keep inflation at 2% and stimulate growth. To that end they’ve plunged into negative interest rate territory. Banks across the eurozone will now pay the ECB 0.5% to park their funds.
The effect of this is European banks struggling to maintain their bottom line. Deutsche Bank stock is at an all-time-low. Macro trader Raoul Pal, who famously predicted the 2008 recession, said low rates are the fastest way to “f*ck the banking system.” In his words, EU banks are “RIGHT on the CLIFF OF DEATH.”
Central banks have a variety of “weapons” at their disposal to stimulate growth (specifically interest rates and QE).
They work really well when used sparingly in the aftermath of a crisis. In the wake of the 2008 recession, central banks were able to slash interest rates and trigger QE to restart the economy again.
But when the rates are already at zero or below, there’s nowhere left to go. Those tools are no longer effective, because they’ve become the “new normal.” If a recession hits, those weapons won’t work.
“Central bankers around the world are trying to justify the efficacy of negative interest rates. So far, it’s been a failed experiment” – Mike Collins, PGIM
Until now, banks have passed the negative rates to their corporate clients, but not retail clients. If the ECB pulls the trigger again, banks will be forced to pass the negative rates onto its customers. It’s already happened in Denmark where wealthier depositors pay 0.6% to park their money.
As negative rates sweep Europe, people will increasingly look for better ways to store value. There’s a good chance they’ll find bitcoin; a digital store of value that can’t be manipulated. Better yet, an asset that appreciates in value over the long term.
Bitcoin’s beauty isn’t just the global peer-to-peer transfer system. It’s an alternative monetary policy that can’t be manipulated or devalued. In stark contrast to the euro, it has a fixed supply and deflationary nature.
And every time the ECB cuts rates and floods the market with euros, it pushes someone else to the hard money of bitcoin.
Last modified: March 4, 2021 2:39 PM