Europe's monetary institutions took aggressive steps on Thursday to stem the region's economic crisis and encourage more lending. The European Central Bank cut its key lending rate to a record-low 0.75 percent, and cut its deposit rate to 0 percent from 0.25 percent. The Bank of England announced a third round of quantitative easing worth 50 billion euros ($78 billion) and left interest rates unchanged at 0.5 percent. Both moves were widely expected by economists.
Are these actions enough to reverse the fortunes of the continent's slumping economies? Both England and the European Union are suffering from recessions. To date, the efforts of combining easy monetary policy with fiscal austerity have yet to produce results. And as Daniel Gross and John Tamny, editor of RealClearMarkets.com, discuss in the accompanying video, recent experience suggests that simply making it easier for banks to borrow money from the central bank won't do much to alleviate the economic crisis afflicting Europe.
Many euro zone banks, particularly in Spain and Italy, cannot raise funds on the open market because investors are wary about the banks' creditworthiness—and hence are reluctant to lend. Meanwhile, yields on government debt continue to levitate at dangerously high levels: Spanish 10-year bonds jumped 13 basis points to 6.54 percent Thursday, the highest since June 29. Investors were initially optimistic about the health of EU banks after a new bank bailout deal was agreed to last week but a lack of confidence in state and bank finances could prevent any economic momentum from sticking in the euro zone.
Tamny argues that the recent "flurry of activity" in Europe could result in the opposite intended effect.
"There's this mystical belief out there that you can make credit cheaper and cheapen money and some how get the economy moving again," Tamny says in the accompanying video. "But in fact both make things much worse."
Tamny contends that the stimulative measures promoted by the Bank of England devalues the pound and takes incentives away for investors to commit capital. "This is not the way to get England out of recession," he adds. The ECB's interest rate cuts are not likely to increase economic prosperity any more than the previous cuts, Tamny says, citing the U.S. and Japan as examples of countries with very low rates and weak growth.
Separately, Ireland -- one of the first EU nations to receive international bailout funds -- sold $625 million worth of its debt Thursday in its first open debt auction since September 2010. China surprised markets by cutting its benchmark and lending rates today.
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