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| European Central Bank Breaks New Ground to Press Growth | European Central Bank Breaks New Ground to Press Growth |
| (3 months later) | |
| FRANKFURT — Banks typically make money on the cash they park at a central bank. Now the European Central Bank wants them to pay for the privilege. | |
| The move, a so-called negative interest rate, is part of a wide-ranging set of measures aimed at combating the crippling combination of slow growth and superlow inflation. | The move, a so-called negative interest rate, is part of a wide-ranging set of measures aimed at combating the crippling combination of slow growth and superlow inflation. |
| The initiatives, announced on Thursday by the European Central Bank, include the usual fare — interest rate cuts and cheap bank loans. But the bank also showed a willingness to test new tools like the negative interest rate, in a nod to just how worrisome the economic situation has become in Europe. | The initiatives, announced on Thursday by the European Central Bank, include the usual fare — interest rate cuts and cheap bank loans. But the bank also showed a willingness to test new tools like the negative interest rate, in a nod to just how worrisome the economic situation has become in Europe. |
| Taken collectively, the measures send a strong message to investors, businesses, and citizens that the central bank is determined to put Europe on a path to stronger growth. | Taken collectively, the measures send a strong message to investors, businesses, and citizens that the central bank is determined to put Europe on a path to stronger growth. |
| The bank president, Mario Draghi, also signaled that he was prepared to go further if necessary. In doing so, he left the door open to employ the same powerful, albeit controversial, bond-buying program that was used to restart growth in the United States. | The bank president, Mario Draghi, also signaled that he was prepared to go further if necessary. In doing so, he left the door open to employ the same powerful, albeit controversial, bond-buying program that was used to restart growth in the United States. |
| “We think this is a significant package,” Mr. Draghi said on Thursday at a news conference. “Are we finished? The answer is no.” | “We think this is a significant package,” Mr. Draghi said on Thursday at a news conference. “Are we finished? The answer is no.” |
| With European political leaders struggling to address the region’s economic woes, the central bank is aggressively moving to prevent the region from lapsing into the same sort of stagnation that has long afflicted Japan. Just this week, there was news that inflation in the euro zone had fallen to a mere 0.5 percent for the year ended in May, well below the bank’s target of around 2 percent. | With European political leaders struggling to address the region’s economic woes, the central bank is aggressively moving to prevent the region from lapsing into the same sort of stagnation that has long afflicted Japan. Just this week, there was news that inflation in the euro zone had fallen to a mere 0.5 percent for the year ended in May, well below the bank’s target of around 2 percent. |
| Even without outright deflation, it is a perilous trend that can cause people to delay purchases and can undercut corporate profit and job creation. The central bank’s staff expects inflation to return to 1.1 percent in 2015 and 1.4 percent in 2016. | Even without outright deflation, it is a perilous trend that can cause people to delay purchases and can undercut corporate profit and job creation. The central bank’s staff expects inflation to return to 1.1 percent in 2015 and 1.4 percent in 2016. |
| The bank is taking a broad tack in its efforts. | The bank is taking a broad tack in its efforts. |
| The central bank cut its benchmark interest rate on Thursday to 0.15 percent, a record low, and said it would offer banks cheap four-year loans — with strings attached to make sure they lend the money to businesses. | The central bank cut its benchmark interest rate on Thursday to 0.15 percent, a record low, and said it would offer banks cheap four-year loans — with strings attached to make sure they lend the money to businesses. |
| In addition, the central bank said it was moving closer to making purchases of packages of business loans, another way of funneling credit to companies in troubled countries like Greece that desperately need it. | In addition, the central bank said it was moving closer to making purchases of packages of business loans, another way of funneling credit to companies in troubled countries like Greece that desperately need it. |
| The negative interest rate, which the central bank will impose beginning June 11, is meant to encourage banks to put their money to work to rebuild the battered euro zone. It is also aimed at weakening the euro, by making exports more competitive. | The negative interest rate, which the central bank will impose beginning June 11, is meant to encourage banks to put their money to work to rebuild the battered euro zone. It is also aimed at weakening the euro, by making exports more competitive. |
| The markets welcomed the measures. European stocks rose broadly, with the German DAX index reaching a record high. | The markets welcomed the measures. European stocks rose broadly, with the German DAX index reaching a record high. |
| But it is unclear whether such efforts will have the desired long-term effects. The negative interest rate has never been tried on such a large scale, so its real-world effects are hard to predict. | But it is unclear whether such efforts will have the desired long-term effects. The negative interest rate has never been tried on such a large scale, so its real-world effects are hard to predict. |
| And many economists wonder whether the central bank is doing enough, given the current economic picture. The central bank stopped short of using its metaphorical bazooka, the large-scale purchases of bonds and other financial assets known as quantitative easing. | And many economists wonder whether the central bank is doing enough, given the current economic picture. The central bank stopped short of using its metaphorical bazooka, the large-scale purchases of bonds and other financial assets known as quantitative easing. |
| “The conventional measures are all done,” said Guntram B. Wolff, director of Bruegel, a research organization in Brussels. “What remains is quantitative easing.” | “The conventional measures are all done,” said Guntram B. Wolff, director of Bruegel, a research organization in Brussels. “What remains is quantitative easing.” |
| But quantitative easing is a tricky proposition in Europe. The bank would have to make the politically delicate decision of what assets to buy from among the euro zone’s 18 members. The Federal Reserve in the United States had much more power to pursue its bond buying several years ago in a program that it is only now winding down. | But quantitative easing is a tricky proposition in Europe. The bank would have to make the politically delicate decision of what assets to buy from among the euro zone’s 18 members. The Federal Reserve in the United States had much more power to pursue its bond buying several years ago in a program that it is only now winding down. |
| Mr. Wolff and other Bruegel analysts have said the European Central Bank could probably buy bonds issued by European government agencies, as well as corporate bonds and bank debt. It would be more problematic, they said, to buy the bonds of individual countries. | Mr. Wolff and other Bruegel analysts have said the European Central Bank could probably buy bonds issued by European government agencies, as well as corporate bonds and bank debt. It would be more problematic, they said, to buy the bonds of individual countries. |
| To embark on any quantitative easing program, Mr. Draghi will have to build consensus among the members of the bank’s 24-member Governing Council. He moved judiciously in the bank’s latest measures, gaining unanimous support for the policies on Thursday. | To embark on any quantitative easing program, Mr. Draghi will have to build consensus among the members of the bank’s 24-member Governing Council. He moved judiciously in the bank’s latest measures, gaining unanimous support for the policies on Thursday. |
| In the summer of 2012 as the crisis flared anew, Mr. Draghi similarly built internal support for a sweeping promise to backstop the countries’ governments financially and “do whatever it takes” to preserve European unity. | In the summer of 2012 as the crisis flared anew, Mr. Draghi similarly built internal support for a sweeping promise to backstop the countries’ governments financially and “do whatever it takes” to preserve European unity. |
| The backing of Germany, the euro zone’s largest country, will be particularly important. In the past, dissent from the influential German Bundesbank has undercut support for the European Central Bank. | The backing of Germany, the euro zone’s largest country, will be particularly important. In the past, dissent from the influential German Bundesbank has undercut support for the European Central Bank. |
| Despite the challenges, Mr. Draghi laid out on Thursday the most explicit road map to date of what an asset-buying program could look like. The bank, he said, would “intensify preparatory work related to outright purchases.” He indicated that it would buy private sector asset-backed securities. | Despite the challenges, Mr. Draghi laid out on Thursday the most explicit road map to date of what an asset-buying program could look like. The bank, he said, would “intensify preparatory work related to outright purchases.” He indicated that it would buy private sector asset-backed securities. |
| The effect could be limited because the number of securities that qualify is relatively small. But the plan could bring the central bank closer to a broader asset-buying program. | The effect could be limited because the number of securities that qualify is relatively small. But the plan could bring the central bank closer to a broader asset-buying program. |
| The European Central Bank will also begin offering four-year loans to banks at the benchmark interest rates, under conditions meant to ensure that lenders use the money to issue loans to businesses. Banks will be required to show that their net lending to firms increased as a result of the central-bank cash. If not, banks would be forced to repay the money early. | The European Central Bank will also begin offering four-year loans to banks at the benchmark interest rates, under conditions meant to ensure that lenders use the money to issue loans to businesses. Banks will be required to show that their net lending to firms increased as a result of the central-bank cash. If not, banks would be forced to repay the money early. |
| It is unclear whether euro zone banks will respond to the central bank’s action. Many banks are already struggling with large portfolios of problem loans. | It is unclear whether euro zone banks will respond to the central bank’s action. Many banks are already struggling with large portfolios of problem loans. |
| “The rate cut, assuming it filters to the market, will assist, but not enough,” said Petros Haidemenos, the general manager of Kalamea Foods, a midsize importer that distributes brands like Kettle Chips, Fiji water and Dippin’ Dots ice cream snacks in Greece. | “The rate cut, assuming it filters to the market, will assist, but not enough,” said Petros Haidemenos, the general manager of Kalamea Foods, a midsize importer that distributes brands like Kettle Chips, Fiji water and Dippin’ Dots ice cream snacks in Greece. |
| Like many Greek businesses, Kalamea Foods has struggled for the last several years, partly because banks lowered or closed credit lines after a wrenching recession. But given the high level of nonperforming loans at Greek banks, Mr. Haidemenos said he doubted that the measures taken on Thursday would unleash the liquidity needed to help jump-start business activity. | Like many Greek businesses, Kalamea Foods has struggled for the last several years, partly because banks lowered or closed credit lines after a wrenching recession. But given the high level of nonperforming loans at Greek banks, Mr. Haidemenos said he doubted that the measures taken on Thursday would unleash the liquidity needed to help jump-start business activity. |
| “The reason banks are not lending is because they know they will lose the money,” he said. | “The reason banks are not lending is because they know they will lose the money,” he said. |