ECB has maintained negative rates for a decade with a reason to lower its currency, euro, exchange rate as compared to other currency. ECB and policy makers hope that it would spark investment in euro zone as well as making its export products less expensive.
However, it has proved that negative rates did not push wealthy investors or money managers invested in euro zone for job creation. Its economy is still in recession. USA had credit crunch issues in 2009, and it’s out of recession in around 2013. Its interest rate set by FED has not been in negative territory, and USD is a high valuation currency.
Here are the issues:
1. Euro is used
by 800 million users as main currency, thus investors like to park their cash
in euro. The same with USD as US economy is always strong with its consumer
spending habits.
·
How could ECB kicked out of investors without harming its own
economy. · Negative rates helped, but other assets inflated and investors parked or invested money elsewhere.
2. EU is a
union of many western and eastern countries with different working cultures as
well as knowledge and productivity.
·
It is impossible to make all EU people working with the same
ethics or being productive to compete with workers in other countries such as
USA.· Policy like having same pension benefits, minimum wages, and vacation days would make unbalanced work forces and scare business owners away.
· Unions are not good or on the same side with business owners to create jobs or compete with other around the world.
3. EU has
implemented many policies that made it uncompetitive such as carbon tax and
high income taxes to the wealthy individuals. They would move their assets elsewhere
with lower tax brackets.
4. The negative
rates have forced assets inflated such as resident housing markets. This will
be blown up in due time. Keeping negative rates forever would hurt banks, so
they have no time to select good business to invest in. All they are thinking
about is to flee EU.
5. Without
common euro, Greece should have been declared bankruptcy and been forced to
spend responsibly without impacting other nations currently within EU.
B.
Possible solutions
The main issue in EU would be productivity of their work force and common euro.
1. Dismantle
the common euro and EU zone, thus all countries must be responsible about their
economy and budgets. This would eliminate unproductive time by other strong
economy countries such as Germany to interfere and govern. Time and effort are
money. This would also lower noise as bad hands in another country business.
2. Maintain
CETA as free trade is a global trend, which could not be broken or changed.
3. Lower
starting vacation days to 2 weeks. This would be aligning with USA and Canada.
This helps to increase productivity by local work forces.
·
New hire with 2 weeks of vacation should get high pay checks as
compared with current 4-week vacation workers.· People like to switch to 2 weeks of vacation should get higher pay checks.
4. Cancel
carbon tax and provide incentive to industrial companies to install a system to
capture CO2 and store carbon.
5. Companies
producing electric cars or hydrogen fuel cars would get tax credits, but car
buyers cannot get credits. Many people buy electric cars to show off their
wealth, thus it’s not fair to get other people’s money to pay for those.
6. Getting car
companies to invent exhaust system to reduce CO2 release from gasoline cars.
Give them tax credit proportional to the decreased amount.
7. Get interest
rate back to zero and have contingency plan to deal with explode housing
markets.
8. Interest
rate should not be lower than 1%, this would help to maintain or keep income
funds in business as well as extra income to pensioners.
9. Do QE during
recession or exploding housing market could be strategies described in https://peterboroughtechservices.blogspot.com/p/doingqe-during-recession-buying-fixed.html
10. Lower
personal income tax for everyone, because wealthy people are paying higher
taxes anyway. It is better to be fair and keeps everyone happy. Let’s working
people have money to spend as they like is better than government spending like
Greece. You could argue that you’re better than Greek governments, but you
cannot guarantee the competency of incoming governments.
11. Let each
CETA member set minimum wages in their country based on its own productivity
and living costs. This would help job creation in Eastern Europe and decrease
illegal immigration to Western Europe, where productivity higher and job
availability or concentration. Eastern Europe would serve Western Europe as a pool of low labour cost's work forces. They don’t need to open offices in other countries such as China
for lower labour costs.
12. Let’s assume
that Hungary and Poland wanted to spin off from EU to create their own
currencies and maintain in CETA. They could perform the follow steps immediately
without waiting currency’s exchange rates
·
Each country would reach agreement with EU to spin off
·
Set their own central banks’ interest rates for lending. Disregard
rates set by ECB.
·
Use euro as national currency until working out their currency and
exchange rates. This is like pegging your currency to euro temporarily.
·
Set minimum wages based on euro
·
Performed step 9 above to grow economy by letting local banks to
perform lending with its own national debts
·
When the currency introduced with exchange rates. Revisit minimum
wages in new currency and start using new currency.
·
Continue trading as usual with new currency and be a member of
CETA.
The main issue would be that EU policy made themselves uncompetitive on the world stage.
Usually currency is tied to the performance of a national economy.
ReplyDeleteIf economy was strong, investors would buy stocks or invest in the country that push up the currency value. This would cause a brake in exports.
During trouble time such as recession, traders fleed the country or stocks that would lower value of national currency. However it would help export indirectly, and this would bring the economy back on track.
Using the same or pegging your currency to another currency such as common euro would cause trouble to your national economy. If your local jobs were weak and euro was in high value, this was a double blow to your effort to bring economy back on track.
To break up from the common euro, you could run your national economy independently and regard euro as a pegging currency. Until you worked out reasonable exchange rate, then your new currency would be official in your nation and to international communities.