ECB Faces Challenges CWANSince the financial markets meltdown in 2007-2008, countries in the EU have been from one economic crisis to another. The ECB has had to bail out countries like Greece, Cyprus, Spain, Ireland, and Portugal. In addition, unemployment in the EU remains at record levels. According to figures released by Eurostat, 25 million people in the EU are unemployed. Several long-standing issues make Europe’s economy weak. These include:

-Demographic imbalances

Unlike other continents, Europe has an ageing population. UN figures show that the number of people ages 15-59 will fall over the next 40 years. This means the number of young people who can work to support the older generation and growth will shrink considerably.

-Weak economies

Europe’s Achilles heel stems from countries like Greece that have extremely weak economies. These countries have become a burden that must be borne by countries with stronger economies like Germany. More recently, however, fears of deflation have surfaced in these stronger economies. Unemployment in Greece and Spain, two of the most vulnerable nations, stands at 26.4% and 24.5% respectively.

Enter the ECB

In light of these problems, the ECB has recently cut interest rates to record lows (0.05%) to prevent deflation from further derailing the EU’s already weak economy. Inflation – which measures the rate of change in the general price level – across the EU hit the 0.3% mark in August, the weakest since 2009. The last rate cut was somewhat surprising given that the ECB had cut rates from 0.25% to 0.15% in June. In addition to the interest rate cut, the ECB also launched an asset purchase program, which in simple terms means buying debt from banks. The aim is to make it easier for businesses and individuals to borrow money. However, these actions have made the euro less attractive, causing the currency to plunge to a 13­-month low against the US dollar.

Austerity no more

The new focus on growth is a departure from the ECB’s fiscal austerity measures. In December 2012, ECB President Mario Draghi urged countries across the EU to persevere with austerity measures aimed at overhauling their economies. These measures included spending cuts in public and private sectors as well as overhauls of pension systems. Since then, it has widely been acknowledged that the austerity philosophy was not what the region needed.

EU members in favor and against interest rate cuts

While announcing the new interest rate cuts, Draghi said, “Some members were in favor of doing more, some were in favor of doing less.” He did not give names of EU members who had opposed or supported this move. However, the Wall Street Journal reports that Germany’s Central Bank President Jens Weidmann opposed this rate cut. On the other hand, CNBC reports that struggling Eurozone countries like Italy were in favor of the rate cut.

According to the WSJ, Europe’s economy is lagging behind economies such as the UK and US because it did not take aggressive measures after the financial crisis. The recent rate cut is an indication that the ECB may be ready to move in that direction.

By CWAN Global Press

The Canadian Wealth Advisors Network (CWAN) was established in March of 2009 as an online forum where investment professionals share ideas and best practices that allow them to meet the growing needs of their clients. As the CWAN community grew and evolved, it was expanded to serve both advisors and investors. Garnet O. Powell, MBA, CFA is the Editor-in-Chief of the Canadian Wealth Advisors Network (CWAN) magazine. He is an investment management professional with more than 20 years of experience. linkedin.com/in/garnetpowell

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