The European Central Bank (ECB) has to do something with the weakening economy to avoid an outright financial crisis in Europe. However, its toolbox is running empty.
As the 25 members of the European Central Bank’s Governing Council will meet in Vilnius, Lithuania next Thursday, they will be facing a tough dilemma — namely, how to mitigate the risks of an economic slowdown and avoid destabilizing side effects on the region’s banking and financial system.
According to a survey performed by Bloomberg, a majority of economists predict that the ECB will leave the benchmark policy rate at zero and try to inject additional monetary stimulus by offering the regional banks generous terms on the upcoming long-term lending program.
The policymakers are expected to review their economic forecasts and share their views on the economic developments in the second half of the year. Considering the consequences of a US-China trade war and an upcoming cyclical economic downturn in the region, the ECB might be forced to lower the forecasts and consider additional monetary accommodation.
European Central Bank Loans: Easy Money, Harsh Conditions
The head of the European Central Bank, Mario Draghi, is expected to reveal the details of the loan program. The Eurozone’s monetary policy administrator is expected to offer generous terms — with the rate on two-year loans expected to be below the current benchmark rate by -0.25 percent or lower. These measures should stimulate lending and, as a consequence, prop up business and consumer activity in the economy.
However, the central bank won’t do anything to soften the pain from a negative deposit rate that will continue to cripple banks’ profit margins and inflict pain on the European banking sector. Currently, the ECB charges 0.4 percent on excess reserves parked at the central bank’s accounts. However, the banks cannot pass it on to consumers and have to absorb the costs.
The ECB is in no hurry to mitigate these negative consequences because it is concerned that it would hinder banks’ willingness to lend money and reduce the stimulus effect on the real economy.
Paving Way To Decentralization
The European Central Bank may have good intentions, but it may eventually pave the road to Hell. By trying to stimulate lending, the ECB could be effectively destroying the banking system — which is already weakened by financial crises and lopsided business models.
Eventually, this tendency will strengthen the case for a decentralized financial system based on digital currencies, such as Bitcoin (BTC). By undermining the stability of the existing financial system with centralized interventions and unorthodox monetary experiments, the authorities create a favorable environment for a faster transition towards the decentralized peer-to-peer economic model.
Do you believe that the monetary policies of central banks will eventually destroy the existing financial system? Let us know what you think in the comments below.