Western central banks continue to believe that cheap money is the solution to their economic woes. On Thursday, the European Central Bank reduced its main refinancing rate to a record low of 0.75%.
This is unlikely to work. Individuals and firms in these countries have depressed expectations about their economies, something that has a negative feedback effect on investments and consumption. Until this cycle is broken, cheap money is unlikely to do the trick. And this is something economists and policymakers are aware of. It’s surprising then that loose monetary policy is even considered a solution for these economies.
The dilemma for Europe is that short of a fiscal union, painful corrections and even a break-up of the euro zone are the only options. Those are the questions it needs to address. Tinkering with interest rates won’t help.
