THE BLOG
03/05/2013 10:41 BST | Updated 03/07/2013 06:12 BST

ECB Rate Cut Points to a Lack of Collective Confidence

The ECB has decided to cut rates by 25bps to a record low of 50bps this week, in a move that was widely expected. Despite much of the reporting of this historic decision focussing on the market reaction and the effect on the euro, it is the impact of this rate cut on the working lives of consumers and businesses that is the key issue.

I would hope to see some other measures introduced to ensure that people and businesses get some more support in this difficult time. Something similar to that of the UK's Funding for Lending Scheme, which ensures a smooth transmission of cheap credit to SMEs, would work. Looking at some of the commentary from the ECB meetings, it sounds like consultations on these matters have started but, and the Bank of England would back up their European counterparts on this, these things take time to come into effect.

Draghi's remarks about the possibility of negative interest rates are rather out of character and have destroyed all of the euro's gains through the past few days. The most poisonous thing for a currency is negative interest rates. Late last year we saw major Swiss banks like UBS and Credit Suisse impose negative interest rates on Swiss franc accounts, so although they seem like a last resort there is a recent precedent.

Paul Tucker, Deputy Governor of the Bank of England, in recent testimony to the UK government's Treasury Select Committee spoke of a Bank of England conversation that considered negative interest rates here in the UK. Tucker's comments were yet another overt example of an attempt to weaken the currency disguised as policy to get consumers and business spending. It's a bluff though.

This week's US Federal Reserve meeting was different in so much that the rate setting committee openly criticised the fiscal policy of the US government. The FOMC said the nation's fiscal policy is holding back the recovery and that, as a result, they may have to loosen monetary policy further.

The sequestration of spending cuts in the US was a terrible way to cut government expense and the impact has been felt in pretty much every data point in the past month. Indeed, the past month's deterioration has seen the US economy stall quite violently and further call into question the wisdom of the fiscal tightening that has been a key feature of the austerity we have seen on both sides of the Atlantic.

It seems the opposition to fiscal tightening is finally starting to gain higher-level political traction in Europe as opposed to simply being expressed by the people banging drums and waving placards in the streets. Members of the upper echelons of European politics like Olli Rehn and Jose Manuel Barroso, who are the arch advocates of fiscal responsibility, are wavering. The latter said earlier this month that; "while I think this policy is fundamentally right, I think it has reached its limits."

However, the main difference between the Eurozone and the United States right now is the political atmosphere. Businesses want loans to invest in capital and people want mortgages to get their foot on the property ladder and secure a future for their family. The demand for credit is there, but the environment in which either businesses or individuals feel comfortable securing themselves to long-term financing is not.

The lack of predictable market conditions or political stability is what is eating away at the world's confidence. Unlocking that is key to the European future.