Although many were surprised that the ECB this week cut its intervention rate to 0.25% from 0.50%, I was not! True, the ECB had not explicitly prepared the market for it, but the new data showing that inflation in the Euro area had fallen to 0.7% left the ECB no real choice.
In fact this is what I had said in my post dated 1st November, 2013 titled "Europe flirts with disinflation":
'This risk needs to be addressed by the instant adoption of much looser monetary accommodation by the ECB. Reducing interest by a further quarter point would be quite irrelevant from a monetary stance but it helps to reduce the exchange value hardness of the Euro to enhance the export competitiveness of the countries performing structural adjustments. But real solution demands additional monetary stimulus beyond the provision of cheap liquidity to EU banks.'
Indeed the rate of exchange responded immediately with the Euro falling some 1.5% against the US dollar almost instantly the decision was announced. But I continue to argue that this is not enough. The ECB needs to do more.
The problem is that Germany is enjoying the crisis - today again Germany announced record exports in October 2013. They continue to live on Cloud 9 detached from and disinterested about the problems their policy is causing to other Euro countries, especially those that are undergoing restructuring to regain competitiveness. It is an open secret that the Deutsche Bundesbank representative on the ECB voted against the interest rate cut and it had to be the determined personality of ECB President Draghi to overrule the German objections.
Draghi should now take his battle to the next round. Europe needs a deep one shot monetisation to re-capitalise its banks. Unless this happens and in abundant shock and awe quantities, even if interest rates stay at zero till hell freezes over, we will not get anywhere near solving chronic unemployment in problem countries. On the contrary disinflation could slide into deflation from where only God can extract us, without undergoing hostilities that Europe experienced in the first part of last century.
Too horrific even to contemplate.