Europe’s Declining Interest

When we hear the word “negative” most of us tend to freak out and try to stay away from whatever the topic of discussion is. This attitude seems to be dominating Europe whose banks are currently experiencing negative interest rates – and people find that scary. In an attempt to stimulate the European economy, the European Central Bank began a policy for raising inflation by lowering interest rates across the continent. They went so far that rates actually dropped below zero, essentially making it more costly to save than to spend. Many experts argue that this action has had bad consequences, however. Among them is Paul Achleitner of Deutsche Bank who earlier this week stated that people interpret the negative rates as a bad omen, which means the measures are not producing the desired effect. With ECB’s regulation, more money should be flowing in the economy, as banks are encouraged to give out more loans – which would allow people to consume more. Ideally. Nevertheless, that is not how European consumers are behaving so far. Still recuperating with the aftermath of the financial crisis, people are more willing to save and invest, rather than spend. In fact, just this week the yield on German bonds turned negative for the first time in history. German bonds are usually the investor’s’ paradise – a safe place where money can be set aside no matter the economic chaos in the world. However, with tons of insecurity as to the future of the European Union (mainly due to the United Kingdom’s possible separation from the organization which is to be decided soon), people have started channeling their money into a loss-inducing instrument, thanks to the negative rate. Imagine how worried they are if they actually prefer to lose money in order to stay safe. Part of the problem is the fact that banks are not giving out enough loans. The negative rates mean they won’t earn back what they give out, so they are discouraged. Plus, as we mentioned, they are still behind the US when it comes to recovering from the financial crisis from a few years ago. As a result, the stocks of European banks have been going down. All of this together is a recipe for disaster. Despite these results, ECB’s chairman Mario Draghi stands behind the lower rates.