The Decision Of The European Central Bank

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It is necessary to look at the state of the Eurozone economy in order to properly analyse the decision of the European Central Bank (ECB) on September the 4th to cut its benchmark interest rate to 0.05%, and to launch an asset purchase program to buy debt products from the banks at the same time. Since the collapse of Lehman in 2008 and the global crisis that followed, the Eurozone has been contracting significantly to the extent where “consumer price inflation in the Eurozone fell to 0.3% in September.” (BBC, 2014) The ECB’s reaction has been to reduce interest rates and make use of quantitative easing to try to generate economic growth, albeit without much success. In June 2014, when Mr. Draghi, the president of the ECB, announced its latest cuts to 0.15%, he stated that he couldn’t see the rates dropping below this level. And yet, merely a few months later, he announced a further drop to 0.05%, in what many considered to be a desperate attempt to help pull the Eurozone out of deep crisis. The example of Japan’s 20-year struggle with deflation and a contracting economy was the driving force that pushed the ECB to take this drastic measure. Therefore, it is important to analyse and evaluate the decision of the ECB, set in the context of the current European economic situation, and the alternative policies that could be used.

The introduction of expansionary monetary policy can have many impacts on an economy. One such impact is to stimulate consumer spending and levels of
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