As the recession in Europe painfully proves all attempts at austerity to be dead-ends, the search for the miraculous “silver-bullet” continues. The European Central Bank (ECB) has initiated a negative “nominal” interest rate. That means the ECB, the first monetary authority to ever take such an action in a common currency zone, will be charging commercial banks for the funds they deposit (overnight) rather than paying them interest.
The ECB is pursuing an inflation target of 2% with a dogmatic belief that “this is he rate at which agents [read this as financial speculators and the rentiers] will not be affected in their economic decisions.” To this end, it utilizes three sets of interest rates: (1) the marginal overnight borrowing rate of the banks from the ECB; (2) the basic rate for their re-financing operations; and (3) the rate that is applied to the banks’ deposits at the ECB. In order for the monetary interventions of the ECB to have any effect, the rates on these interests ought to be differentiated. Until very recently, the ECB rate on deposits was set to zero, and the rate on the re-financing operations was 0.25%. The decision of the ECB has now been to reduce the latter rate to 0.15% and the deposit to negative 0.10%. The textbook explanation for this unusual negative interest rate on money deposited by banks rests on the expectation that they should be now motivated to lend their funds instead of keeping them in reserves. Hopefully, this will restore eurozone economic growth by encouraging more lending for “real” investment.
More growth certainly is needed. GDP growth for the zone as a whole was a fragile 0.9% (year-on-year) in the first quarter of 2014 and the IMF forecasts the eurozone’s full-year growth at 1.2%, compared with 2.8% for the United States and 2.9% for the UK. Nevertheless, these observations had not inhibited the storytellers of this epic of austerity. Many now argue that, now that Europe has attained the pre-recession (2007) levels of economic output, it is time to declare victory and pull out. Yet, this post-Vietnam syndrome approach fails to ensure that the European Union as a whole is on an expanding course out of the Great Recession. In fact, deflation continues to be a structural feature of the eurozone’s incurable malaise. With investment expenditures staying rock bottom compared to historical standards, firms are desperately cutting prices to boost their sales. Households, confronted with the ongoing austerity measures, are squeezing their consumption expenditures within a low-demand, low growth—nasty—equilibrium.
The latest economic data out Tuesday morning was generally good. Home building activity remained above the one million a year rate. Consumer prices rose 0.4 percent in May, such that inflation over the last year is now 2.1 percent, about in line with what the Federal Reserve aims for.
But that inflation news carried with it a depressing side note. Now that the Consumer Price Index for May has been published, it is possible to determine inflation-adjusted hourly earnings for the month. And the number is not good.
Average hourly earnings for private sector American workers rose about 49 cents an hour over the last year, to $24.38 in May. But that wasn’t enough to cover inflation over the year, so in real or inflation-adjusted terms, hourly worker pay fell 0.1 percent over the last 12 months. Weekly pay shows the same story, also falling 0.1 percent in the year ended in May.
Pause for just a second to consider that. Five years after the economic recovery began, American workers have gone the last 12 months without any real increase in what they are paid.