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European Monetary Policy

Written By Brian Hicks

Posted May 3, 2013

The state of the Eurozone has been in flux in recent months, based primarily on the health of the euro. Now, the European Central Bank (ECB) is making unprecedented moves to help restabilize the continent’s financial presence.

Mario Draghi sidebarYesterday, the ECB cut interest rates from 0.75 to 0.5 percent, a shift that many predicted would occur based upon the Eurozone’s economic health. 

ECB President Mario Draghi is also offering up loans to banks in need for what is essentially as long as needed, a move that will at least carry over into 2014. In the past, the ECB has never offered loans with such a long time-frame.

As of 5 pm yesterday, the euro had dropped 0.9%, which marks the first turn in a negative direction in 4 days. This comes at a time when the dollar actually made gains on the yen, climbing 0.6%.

The drop in the euro coincided with Draghi and the ECB’s announcement about lowering interest rates.

Euro Stability

When the euro began to falter some months back, Draghi stated that he would do whatever it took to bring the currency back to a stable state.

The bailout situation in Cyprus was truly one of the most nerve-wracking things that could have possibly happened to the Eurozone. And while things ended more calmly than many believed they would, it still had a lasting effect on the health of the Eurozone as a collection of nations, and this effect will no doubt continue for at least the immediate future.

Draghi may be doing everything it takes to bring the Eurozone back to stability, but there is clearly still a long way to go until any sizeable gains are made. Recent data has shown that unemployment in Europe is on the rise, breaking the 12% mark in March.

This means that over 1.7 million additional people are without work in the Eurozone from a year ago, a staggeringly high number that doesn’t seem to be showing signs of falling anytime soon.

At the same time as data regarding unemployment has shown undesirable numbers, prices have slumped to a large extent in Europe, showing signs of continuing deflation. The euro has reached its lowest level of worth since February 2010, leading many analysts to believe that the near future for the currency could be especially rough.

Precious Metals

The future may not look particularly bright for the Eurozone at face value, although it’s important to realize that there is a lot more at play here than most people realize. 

Easing up on austerity and lowering interest rates could have a dramatic long-term effect on the health of the euro, and this could help to bring it back to a state of stability. Already, the announcement from the ECB has sparked a higher amount of trade, and the lowering of austerity levels should help this continue.

Precious metals may also see a shift. Gold and silver have both been in a dramatic state of flux as of late, due in large part to the economic growth and recovery within the U.S. 

But the Eurozone’s need for continued monetary policy shows instability on the other side of the pond, and this could push investors back into gold and silver as safe havens. This could be everything that those who have backed precious metals have been looking for.

The decision by the European Central Bank to ease up on austerity is one that could well finally help to bring the euro back to prominence, which would have a positive effect not only on the economy of Europe, but on the global economy as a whole.

Investors and analysts throughout the world will be keeping a close eye on developments in Europe as they happen.


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