The European Central Bank, or ECB,\u00a0is poised to raise its key policy interest rate<\/a> for the first time in 11 years and to take the first step<\/a> toward lifting it out of negative territory. The bank has indicated that, on Thursday,\u00a0it intends to raise the current rate<\/a> of -0.5%\u00a0to -0.25%. And, with a further hike, it aims to reach 0% by September. \u00a0\u00a0<\/p>\n The object of\u00a0these negative interest rates has been to encourage more lending by commercial banks by charging them for holding their reserves with the central bank, but with inflation raging at more than 8.5% across the eurozone, the ECB has decided that such stimulus is no longer required. The era of easy money appears to be drawing to a close. \u00a0<\/p>\n But the bank faces a dilemma in its battle against inflation, and that\u00a0dilemma stems from debt. \u00a0\u00a0<\/p>\n \u201cThe ECB is between a rock and a hard place,\u201d said Stefan Legge, a lecturer in economics at the University of St. Gallen in Switzerland. \u201cIt must fight inflation \u2014 that\u2019s the mandate\u00a0\u2014 but the debt levels throughout the eurozone are too high for some countries to be able to afford higher interest rates.\u201d\u00a0<\/p>\n In Greece, for example, public debt has topped 190% of GDP<\/a>, while the figure for Italy \u2014 the eurozone\u2019s third-largest economy \u2014 is around 150%<\/a>.<\/p>\n \u201cThe fear is back that Italy or Greece or some other countries will not be able to afford higher levels of interest and could eventually go bankrupt,\u201d Legge said.<\/p>\n Those fears have driven up\u00a0the bond yields of the eurozone\u2019s most heavily indebted governments and making it more difficult for them to borrow and service their debt \u2014 a problem worsened by euro membership.\u00a0 <\/p>\n Without their own currencies, the weaker economies\u00a0are unable to devalue their way out of trouble.\u00a0Lorenzo Codogno, formerly chief economist of the Italian Treasury Department and now a visiting professor at the London School\u00a0of Economics, said it was reminiscent of the debt crisis that almost blew up the euro a decade ago.<\/p>\n \u201cIt may be a slightly different type of crisis, but it might develop again, given that the eurozone is still a fragile construction. The whole system is still pretty fragile. It might come under pressure again,\u201d Codogno said, adding that recent political turmoil in Italy had made matters worse. \u00a0\u00a0<\/p>\n Since the debt crisis, the ECB has calmed investor concerns by buying\u00a0large amounts of bonds issued by those weaker, mostly southern\u00a0eurozone governments; it\u2019s now sitting on about $5 trillion worth<\/a>. This kept bond yields low and prevented them from diverging from the prevailing yields in the stronger economies.<\/p>\n \u201cIt\u2019s been very important in keeping the currency union stable and preventing the weaker euro member states from suffering even more than they have\u00a0during the pandemic,\u201d observed Sarah Fowler, international economy analyst with Oxford Analytica. \u00a0<\/p>\n But\u00a0the bank stopped these regular purchases this month because they were deemed to be fueling inflation, and\u00a0that\u00a0has left the bank in a quandary.<\/p>\n \u201cUltimately it\u2019s hard to see how the ECB gets out of this cycle of the divergencies just widening between northern and southern member states and the constant risk of a debt crisis not being that far away,\u201d Fowler said.<\/p>\n The bank has promised to\u00a0unveil a plan Thursday\u00a0for avoiding more divergence, or fragmentation, and averting another\u00a0crisis.\u00a0It looks as if this may involve the targeted resumption of some bond buying \u2014 a procedure that, along with the expected interest rate hike, has been described as putting your foot on the accelerator and the brake at the same time. \u00a0<\/p>\n \u201cThe ECB is in a trickier position than the U.S. Fed<\/a>,\u201d Fowler said. \u201cAs a result, investors have a lot less confidence in the ECB\u2019s plans.\u201d<\/p>\n Investors demonstrated that when\u00a0the euro plunged to a 20-year low<\/a> against the U.S. dollar this month<\/a>. None of the economists we consulted for this article, however, thought the euro\u2019s problems would prove terminal.<\/p>\n \u201cI think it will be less serious this time,\u201d said Jessica Hinds of the Capital Economics consulting firm. \u201cThe fundamental imbalances between the different member states are a lot smaller than they were.\u00a0I think there will be less of an existential threat than there was in 2009 and 2010.\u201d<\/p>\n Lorenzo Codogno pointed to the fact that Europe\u2019s commercial banks are in much better shape than they were a decade ago<\/a>, with a lower level of nonperforming loans. While he\u00a0acknowledged that there are many threats to the stability of the eurozone, he doesn\u2019t think its survival is in doubt. \u00a0<\/p>\n \u201cI don\u2019t believe there is a significant risk of the monetary union falling apart,\u201d he said. The consequences of departure for individual member states could be horrendous. In Italy\u2019s case, he said, it would prove \u201chugely disruptive.\u201d<\/p>\n But perhaps the most powerful force holding the currency bloc together is not economic, but political.<\/p>\n \u201cFrom an economic point of view, this whole euro area never made much sense,\u201d said Stefan Legge. \u201cBut it was not an economic project; it was a political project. It was a political symbol. It says, \u2018We have a common currency.’\u201d<\/p>\n But the cost of that symbol, he said,\u00a0could be decidedly economic: higher inflation and\u00a0a weaker currency than many of the northern member states \u2014 especially Germany \u2014 would prefer.<\/p>\n There\u2019s a lot happening in the world.\u00a0 Through it all, Marketplace is here for you.<\/span><\/b>\u00a0<\/span><\/p>\n You rely on Marketplace to break down the world\u2019s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.<\/span>\u00a0<\/span><\/p>\n Your donation today powers the independent journalism that you rely on<\/a>. <\/span>For just $5\/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you. <\/span><\/b>\u00a0<\/span><\/p>\n<\/div><\/div>\n\n The European Central Bank, or ECB,\u00a0is poised to raise its key policy interest rate for the first time in 11 years and to take the first step toward lifting it out of negative territory. The bank has indicated that, on Thursday,\u00a0it intends to raise the current rate of -0.5%\u00a0to -0.25%. And, with a further hike, …<\/p>\n","protected":false},"author":1,"featured_media":44385,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[161],"tags":[],"_links":{"self":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/posts\/44384"}],"collection":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/comments?post=44384"}],"version-history":[{"count":0,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/posts\/44384\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/media\/44385"}],"wp:attachment":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/media?parent=44384"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/categories?post=44384"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/tags?post=44384"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"Stefan](\"https:\/\/www.marketplace.org\/wp-content\/uploads\/2022\/07\/HT-Stefan-Legge-002.jpg?w=740\")
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