European Central Bank Runs Out of Ammo to Stop Eurozone Recession
The ECB is slashing rates but the recession train may have left the station. | Source: Shutterstock
Whatever it takes.
Thats the mantra of Mario Draghi and the European Central Bank (ECB) as they slashed interest rates yet further into negative territory on Thursday. The ECB cut the base rate to -0.5% and unleashed another aggressive bond-buying program (€20 billion) in a bid to stimulate the eurozone economy.
But as the eurozone teeters towards recession, its time to admit that the ECB has run out of ammo. Draghi has gone down shooting and theres nothing left in the barrel.
The dominos line up to fall
The threats to the eurozone are numerous. The blocs largest economy, Germany, is on the brink of recession, partly driven by a monster slump in the nations illustrious auto industry. The Macroeconomic Policy Institute (IMK) puts Germanys risk at 60% right now.
Germanys economy went negative in the second quarter of 2019 and edges close to recession. Source: BBCGermanys economy hit by declining manufacturing and industrial output. Source: Bloomberg
Brexit uncertainty continues to wreak havoc on the economies of Britain and the wider EU itself. Manufacturing and investment demand has weakened and the country only narrowly avoided a technical recession this month.
Italy, the eurozones third-largest economy, has seen zero growth for twenty years. It carries an insurmountable deficit, its banks are at crisis point, and the political tension remains on a knife edge.
ECB negative interest rates arent working
The ECB has an aggressive mandate to keep inflation at 2% and stimulate growth. To that end theyve plunged into negative interest rate territory. Banks across the eurozone will now pay the ECB 0.5% to park their funds.
The effect of this is European banks struggling to maintain their bottom line. Deutsche Bank stock is at an all-time-low. Macro trader Raoul Pal, who famously predicted the 2008 recession, said low rates are the fastest way to f*ck the banking system. In his words, EU banks are RIGHT on the CLIFF OF DEATH.
And that is how you totally FUCK the banking system. The EU Banks are RIGHT on the CLIFF OF DEATH. pic.twitter.com/VbbwE1yF8z
— Raoul Pal (@RaoulGMI) August 7, 2019
The ECB has no ammo left
Central banks have a variety of weapons at their disposal t ...