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Can you explain a little bit about what you mean by the "...and really can't" line? Is this just because they lack some of the mechanisms of a true central bank

Can you explain a little bit about what you mean by the "...and really can't" line? Is this just because they lack some of the mechanisms of a true central bank as a shared entity across the eurozone, or something less obvious?

Tsarbomb 4y ago
I was wondering about this too. I'm in Canada and we've been raising our rate even more aggressively than the USA. What is stopping Europe?
- pkaye 4y ago
  Italy and Greece have a lot of debt so raised interest rates means their payments go up a lot more. Since they are part of the euro and can't print their own money they have no easy options.
nomorewords 4y ago
The common explanation is that it will fuck up the countries with a high debt to GDP ratio, like Greece
cko 4y ago
I think it's because some of the member states are already heavily indebted with weak economies, like Greece and Italy. A recession caused by monetary tightening may be annoying for Germany or the Netherlands, but very bad for most of the southern European countries.
- FabHK 4y ago
  This. Italy already pays 1.9 percentage points higher rates than Germany, and has 140% debt to GDP. If the ECB sharply raises rates, then Italy's debt might become unsustainable. The Economist notes: "The country probably cannot tolerate yields on its bonds much above 4%. Around that point, the goals [of the ECB] of price stability and defending indebted countries would become irreconcilable. Should interest rates surge, the euro area would look dangerously frail. " https://www.economist.com/leaders/2022/06/23/how-fighting-inflation-could-imperil-the-euro-zone https://www.economist.com/leaders/2022/06/23/how-fighting-in...
jmyeet 4y ago
> "...and really can't" So, a certain level of inflation is actually good. The general benchmark modern developed nations go for is 2-3%. High inflation can cause all sorts of problems even without getting into hyperinflation. Negative inflation ("defaltion") or even zero inflation causes problems too. Just look at Japan over the last 35 years to see this in action. Deflation promotes saving rather than spending such that there is less economic activity and this has a knock-on effect on creating unemployment. Side note: lack of consumer spending is a ticking time bomb for China thanks to having to fund your own retirement and the demographics caused by the One Child Policy. So 2-3% is really the sweet spot. It's also worth noting that countries that run deficits like inflation too as it decreases the real value of their debt. Central banks can contrl interest rates by setting the benchmark rate. For example, if the Federal Reserve offers 5% for US Treasury bonds (which are considered essentially "risk free") then why would a bank lend a business or you money at less than 5%? It's more risk for a lower return. This is monetary policy. So as you can imagine if someone can only borrow money at 20% vs 2% it will have an impact on economic activity. That's the point. In the US, high inflation is seen as being driven by demand outstripping supply so interest rates are a crude tool for reducing demand. That's why the Fed has been raising rates. The eurozone largely has the same inflation problem thanks to energy demand and housing but doesn't have the economic activity driving it. So if the ECB were to aggressively raise rates, the fear is this could cause a deep recession in the eurozone. So that's what I mean by "they really can't> The eurozone has the inflation but not the economic activity.

Tsarbomb 4y ago

I was wondering about this too. I'm in Canada and we've been raising our rate even more aggressively than the USA. What is stopping Europe?

pkaye 4y ago
Italy and Greece have a lot of debt so raised interest rates means their payments go up a lot more. Since they are part of the euro and can't print their own money they have no easy options.

nomorewords 4y ago

The common explanation is that it will fuck up the countries with a high debt to GDP ratio, like Greece

cko 4y ago

I think it's because some of the member states are already heavily indebted with weak economies, like Greece and Italy. A recession caused by monetary tightening may be annoying for Germany or the Netherlands, but very bad for most of the southern European countries.

FabHK 4y ago
This. Italy already pays 1.9 percentage points higher rates than Germany, and has 140% debt to GDP. If the ECB sharply raises rates, then Italy's debt might become unsustainable. The Economist notes: "The country probably cannot tolerate yields on its bonds much above 4%. Around that point, the goals [of the ECB] of price stability and defending indebted countries would become irreconcilable. Should interest rates surge, the euro area would look dangerously frail. " https://www.economist.com/leaders/2022/06/23/how-fighting-inflation-could-imperil-the-euro-zone https://www.economist.com/leaders/2022/06/23/how-fighting-in...

jmyeet 4y ago

> "...and really can't" So, a certain level of inflation is actually good. The general benchmark modern developed nations go for is 2-3%. High inflation can cause all sorts of problems even without getting into hyperinflation. Negative inflation ("defaltion") or even zero inflation causes problems too. Just look at Japan over the last 35 years to see this in action. Deflation promotes saving rather than spending such that there is less economic activity and this has a knock-on effect on creating unemployment. Side note: lack of consumer spending is a ticking time bomb for China thanks to having to fund your own retirement and the demographics caused by the One Child Policy. So 2-3% is really the sweet spot. It's also worth noting that countries that run deficits like inflation too as it decreases the real value of their debt. Central banks can contrl interest rates by setting the benchmark rate. For example, if the Federal Reserve offers 5% for US Treasury bonds (which are considered essentially "risk free") then why would a bank lend a business or you money at less than 5%? It's more risk for a lower return. This is monetary policy. So as you can imagine if someone can only borrow money at 20% vs 2% it will have an impact on economic activity. That's the point. In the US, high inflation is seen as being driven by demand outstripping supply so interest rates are a crude tool for reducing demand. That's why the Fed has been raising rates. The eurozone largely has the same inflation problem thanks to energy demand and housing but doesn't have the economic activity driving it. So if the ECB were to aggressively raise rates, the fear is this could cause a deep recession in the eurozone. So that's what I mean by "they really can't> The eurozone has the inflation but not the economic activity.