News You Really Need To See: “Europe Crisis Is Resistant to Remedy of Low Rates”

“Europe Crisis Is Resistant to Remedy of Low Rates”

The New York Times, September 3, 2014, p.B1

It is getting harder and harder to find free parking for large sums of euros.  In a battered regional economy, the search for safety has become so desperate that some European investors are willing to pay for the privilege of lending to France — a country dealing with economic stagnation, political gridlock and a tough business climate.  Investors might not expect their money to grow in France, but they trust that it won’t disappear.  The yield on French government two-year bonds turned negative on Monday, before edging back into positive territory Tuesday.  Yields on some German debt, another perceived bastion of safety, have been below zero off and on since last month.  In addition, banks have been willing to pay their most solid peers to store their money overnight.  This upside-down financial world, in which lenders pay borrowers to take their money, is the result of a decision by the European Central Bank in June.  The E.C.B. effectively imposed a penalty on banks that park money in the central bank’s vaults.  The radical move was an attempt to stoke the economy by forcing banks to lend to businesses and consumers. … In many cases commercial banks, rather than feeling penalized by the central bank, have decided they would rather pay someone else to keep their money safe.  They may not want to take the risk of lending to, for example, an Italian entrepreneur.  Or the entrepreneurs may be too pessimistic about their business prospects to want to borrow.  The central bank’s so-called negative deposit rate has rippled through European markets, reinforced by fear that the eurozone economy is in decline and by nervousness about war, not only in Ukraine but also in the Middle East.”

Quickie Analysis:  This will make for an interesting section of an economics textbook 50 years from now.  Small consolation to Europeans looking at a triple-dip recession now, though.

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