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The European Central Bank cut interest rates on Thursday from 0.5% to 0.25%? Have conditions in Europe deteriorated to justify this move?

We wouldn’t say that conditions in Europe have deteriorated materially to justify the interest rate cut; however, it would probably be more appropriate to say that conditions simply haven’t improved enough.  Central banks cut interest rates to lower borrowing costs and hopefully stimulate the economy, so perhaps this rate cut is recognition that more needs to be done to get the European economy back on track, although at 0.25% monetary policy options through interest rate changes are now limited. While we have seen some economic data out of Europe that would suggest the region is crawling out of recession, inflation, or the lack thereof is another concern which likely influenced yesterday’s policy announcement.  With the possible turnaround in Europe’s growth prospects, we are also seeing some improvement on the fiscal front, although many Eurozone countries are still not even close to where they need to be when we compare the size of their deficits to their GDP (total economic output).  We provide you with the most recent debt to GDP statistics for all  17 members of the Eurozone  and for the currency bloc itself.  We also highlight the  3% level with a blue line to show where the Eurozone supposedly has established its maximum deficit allowable.  Needless to say such a maximum has never been enforced with 11 of the 17 members and the region itself currently beyond the 3.0% threshold.  While these numbers in isolation look terrible, they are an improvement to what we’ve seen in recent years thanks to years of austerity which have been a long time coming.


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