EUROPE: POLICIES UNDER PRESSURE


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The weakness of Europe’s economy in January has surprised analysts, but it comes as no surprise to Trends Journal subscribers.
IHS Markit’s Purchasing Managers Index (PMI) for the region was stuck at 50.9 as the year began, unchanged from December. Observers had expected it to begin January at 51.2.
The German economy’s strength early this month was diluted by France’s poor output, due in part to widespread strikes and a resulting drop in the service sector’s performance.
The Eurozone’s manufacturing index rose from 46.3 in December to 47.8 in early January, a five-month high, but still below the 50 mark, which would indicate growth. Meanwhile, the service sector’s index dropped from 52.8 in December to 52.2 this month.
Germany’s PMI climbed to 51.1 in January, a signal that the country’s manufacturing sector is beginning to recover from a two-year slump.
Growth in the Eurozone’s economy outside of France and Germany, however, fell to its slowest in six and a half years, especially in Italy and Spain.
Bankers Go Negative on Negative Interest Rates
Across Europe, a growing number of bank executives are raising alarms about the negative interest rates adopted by the European Central Bank and by central banks in Denmark and Switzerland, among other countries.
A negative interest rate means that banks charge depositors a fee to store their money, instead of the usual practice of the central bank paying interest to the depositor.
Negative rates discourage savings and encourage risky speculation, the bankers argue, and are vaporizing banks’ profit margins. These risky loans and investments can quickly go bad if the region’s or world’s economy takes a turn for the worse.
According to David Solomon, Goldman Sachs’ CEO, “In an environment where, for a long… period… interest rates have been zero and money has basically been free, it pushes people out along the risk curve.”
National banks instituted negative rates to make it costly for commercial banks to hold money and, therefore, to make more loans to stimulate economic growth.
Five years ago, the Swiss National Bank instituted negative rates to keep the Swiss franc weak against other currencies and required banks to keep some of their money in the central bank and pay a fee to do so. Some of the banks are passing the fee to their depositors, leading many affluent customers to pull their money out.
Thomas Jordan, president of the Swiss National Bank, counters that negative rates are “essential” to the Swiss economy and that the bank might lower its current -0.75 percent rate even further.
Jamie Dimon, head of JPMorgan Chase, views the negative rates with “trepidation,” adding that “it’s very hard for central banks to forever make up for bad policy elsewhere.”
TRENDPOST: The ECB announced it will begin a review of its €200 billion bond holdings to see if the portfolio should be adjusted to protect against the risks of climate change and other external factors.
The bank’s governing council will “examine how other considerations such as …employment and environmental sustainability can be relevant in pursuing the ECB’s mandate.”
The bank’s mission is to keep prices stable and inflation low. The council plans to review the policy tools it uses to achieve those goals.
At its most recent meeting, the bank left its loose monetary policies and negative interest rates unchanged. However, as we continue to forecast, as economic conditions deteriorate, the ECB will increase Quantitative Easing, lower rates further into negative territory and invent other money pumping schemes to boost GDP growth.
Again, the more money pumped into the system and the lower interest rates fall, the higher gold prices will rise.

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