The European Central Bank (ECB) has held its interest rate steady at one per cent, while the Bank of England (BoE) has also kept its key rate stable at 0.5 per cent. The optimistic view is that the central banks chose this option because signs of recovery in the European and UK economies made it unnecessary for them to try and boost growth. The president of the ECB, Mario Draghi, believes cheap money is helping the Eurozone banking system and supporting its economy.
However, those who chose to believe that with interest rates already so low reserve banks have little room for further effective cuts, are most probably closer to the truth. The dangerous volatility in the European financial system is set to continue this year, as economies continue to struggle and cheap money has done little to boost real economic growth. Job losses continue as companies try to ride out the hard times. And, increasingly arcane and expensive stimulus programmes and grand pronouncements about European fiscal discipline and political support have not had the desired effect.
While the authorities have been focusing on dealing with the sovereign debt crises and preventing a collapse of the Eurozone financial system, they have not paid enough attention to the real problem — getting economic growth back on track. Austerity cuts without a coherent growth plan will simply leave countries stuck with low growth, high unemployment and social unrest. The only way countries can sustainably service their debt burdens is to achieve a growth rate that will provide them with the necessary revenue.
Unfortunately, coherent growth policies are not the responsibility of central banks: that lies with governments. However, faced with the necessity of reducing their debt burdens, the UK and many European governments have not thought beyond cutting spending. This is wrong. While they must tighten their belts to reduce expenditure on consumption, they must also invest in the human and economic infrastructure necessary for countries to sustainably grow their way out of the crisis.
