The European Central Bank is currently facing some major problems on multiple fronts. The perception of security that has build the reputation of the ECB is now on the cusp of collapse.
The ECB seems unable to handle the uncertain future of the Eurozone and some major concerns regarding the EU economy. There are three primary concerns the European Central Bank needs to address which are outlined below.
Monetary Policy And Outlook:
The first issue that needs to be addressed by the ECB is regarding the current EU political climate. How will current EU politics affect the ECB’s future monetary policies? The ECB is currently witnessing a downward trend in their economic indicators. The bank needs to address concerns over whether this is a temporary decline or an indication of a further, more serious recession.
Due to the current uncertain climate in the European Union, the European Central Bank needs to amend its monetary policy, its interest rates and give easy loans to smaller banks to secure their market share. The president of the ECB has recently acknowledged that the current economic downturn is more serious than he had anticipated. As a result, international companies have slowed investment into the Eurozone, causing a further economic stall.
In spite of all of these current hardships, there is still some hope left for the ECB. The governments the Euro Zone are spending more to ease the current situation by raising wages. This has made consumers less concerned about the current economic outlook. It is important that the ECB maintain a long term outlook.
Of equal concern are the Euro’s inflation rates. This problem is not unique to the EU (the Federal Reserve also struggles with inflation dilemmas), but problems in the EU appear to be manipulated. Some European central banks are consciously pumping more money into their own economies to reach inflation targets, resulting in continued increased costs for companies, particularly in wages.
However, the long period of economic recession and a stronger Euro have made the prices of many imported goods very low. This has caused a net increase in imports into the Eurozone. The stubbornly low inflation rates due to a stronger Euro are now a headache for the ECB. They may have no choice but to intentionally pump money into the EU economy in order to reach their economic goals. This problem and suggested solution would cause an imbalance in the current European market, making an economic recession longer and more serious.
Negative Deposit Rate Policies:
Another strange policy of the ECB is that it charges excess rates to the banks for large deposits. The ECB thinks that lenders can make better use of the deposited money than to leave it on account. This policy has impacted the economic condition of the ECB negatively and has reduced investor interest in keeping money at the ECB, resulting in a net decrease in ECB deposits.
Many banks including the Central Bank of France have also suggested that the ECB should review their negative deposit policy. The president of the ECB has recently announced that they must amend this policy. However, this scenario creates a somewhat uncertain situation, and uncertainty pushes investors out of the market.
To help mitigate its impact, the ECB has adopted a new policy to provide regular updates on its policies and amendments. This transparency may serve to better the ongoing crisis, however, it could also backfire.