“Something is rotten in the state of Denmark”
Shakespeare´s Hamlet, Marcellus to Horatio as they meet on the battlements of the castle
The Eurozone is moving into a state of deflation, that is, the value of money is increasing over time. This is incredibly dangerous from an economics point of view as it will defer investment decisions, slowing the economy down even more, and it will push those with cash to invest outside of the Eurozone in other countries where they can get a good return, so investments for projects will dry up in Europe.
Even though there are lots of investors out there looking for investment opportunities they will look at opportunities in Asia, Africa and elsewhere where they can make money instead of loosing money when investing.
As we have seen in recent news the European Central Bank will start “quantitative easing” , which means printing of money to buy about 60 billion euro of government bonds per _month_ from now. They will do this to push out cash into the Eurozone economy and hopefully it will help to restore about 2% inflation per year, which is what the economy needs to be healthy and provide the right incentives for economic activities.
However there is no guarantee that quantitative easing will work. The ECB can prepare the grounds for more investment and activity but it cannot force consumers to spend or companies to invest.
Negative Depositor Rates
With negative interest rates raging in the Eurozone’s bond markets and over €1.5 trillion in European government bonds trading with negative yields, it has been only a matter of time until negative interest rates would spill over to other debtors, not just Europe’s insolvent governments.
In the United Kingdom, retail and business customers with over €500,000 on deposit currently “earn” a negative interest rate of 0.25%. In less euphemistic terms, they have to pay 0.25% per annum to the bank for the privilege of handing the bank their hard-earned money or their business cash.
This means, instead of depositing your money in the bank so that the bank can lend it out to businesses and retail customers for all sorts of economically beneficial purposes, you are financially better off hiding it in the basement. Thus cash in bank is being transformed from an income-producing asset to a costly liability.
The European Central Bank and the national European Central Banks have tried a number of ways to kick-start the European economies but with continuing economic stagnation, the Central Banks are now thinking up more imaginative options.
Sweden, Denmark, Switzerland and Japan have all given negative rates of a sort a go recently. Japan has been dabbling in similar stimulus measures for more than two decades. Its “economic miracle” – its post-war boom – was ended by a banking crisis in 1989. It has since built up colossal government debts.
So where are we heading in Europe folks? Further into unchartered waters.