It may be because of the slowing European economy, the drive for austerity by the continent's national governments, or planned tax increases. But whatever the reasons, the European Central Bank said Thursday it would
hold its benchmark interest rate steady at 1%, making July the 14th straight month that the rate was kept at the same level. The overnight deposit rate will likewise stay at .25% and marginal lending rate at 1.75%.
The International Monetary Fund predicted that the eurozone GDP would rise an extremely modest 1% this year in a report that it released late Wednesday night.
European Central Bank's decision keeps the debate over stimulus versus austerity on center stage. Most European nations have decided to sharply cut government spending and increase taxes. Major economies Germany and England made their announcements about their plans to do so in the last two weeks. But, austerity programs and higher taxes carry with them the chance of regressive economic behavior. Austerity cuts the social safety network from under the relatively poor, the unemployed, and the aged, which also reduces spending. Higher taxes may decelerate business spending and thus reverse many of the incentives for hiring and capital spending.
Still, the risks of taking the stimulus path are equally concerning. The $787 billion stimulus package implemented in the U.S. last year has displayed only modest success, but has added to an already high national deficit and national debt. So far, the Fed has kept U.S. monetary policy loose, just as the
European Central Bank has. Those low rates should stimulate borrowing and economic activity, but that depends on factors outside of government control: how reluctant banks are to lend, and how willing consumers and businesses are to spend.