- In a first such decision by any major bank, the European Central Bank in Frankfurt has undertaken radical changes to revive the sluggish Eurozone economy. Steps include:
- Decreasing its benchmark interest rate to a record low and also lowering of the bank deposit rate to below 0 – this will allow ECB to charge lenders who are parking their funds and will hopefully increase lending to small and medium industries.
- A large liquidity ratio package has also been announced.
- All these may result in weakening of the Euro, increasing competition in the export market and pushing up of the inflation rate.
- The bold changes have been enforced by resident of the ECB, Mario Draghi, who has earlier brought stability to the Eurozone by acting forcefully to preserve the euro.
- The move has been welcomes by Europe which is facing a serious threat of deflation and unemployment.
- Deflation may potentially be dangerous as was seen in Japan where it cut into profits, raised debts eventually discouraging investments and household consumption.
- If the steps successfully revive the economy, India’s trade and other important economic relations will benefit.
- The ECB may also couple this with a massive bond purchase program on the lines of the U.S. Federal Reserve’s quantitative easing.
- If successful, this will help India and other developed countries face with greater equanimity the consequences of the Fed’s ongoing programme of withdrawal of its quantitative easing.
- Read at: http://www.thehindu.com/todays-paper/tp-opinion/an-unusual-recipe/article6102754.ece
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