The ECB’s Aggressive Rate Cuts

In 2024, the European Central Bank (ECB) made critical moves by implementing three interest rate cuts, marking a historic moment in its monetary policy actions. Rate cuts are typically used to stimulate the economy by reducing borrowing costs, and encouraging businesses and consumers to increase investment and spending. However, it is a double-edged sword, as improper management may fuel inflation. The ECB’s third rate cut this year indicates deep concerns about the eurozone’s economic situation, which is facing a complex environment of slowing growth, persistent inflation, and external economic pressures.The backdrop of the third rate cut in 2024 is the severe economic environment the eurozone faces. One of the key factors prompting the ECB to cut rates multiple times this year is the persistence of inflation. Despite the ECB implementing tight monetary policies earlier this year, inflation remains stubbornly high. Energy prices, in particular, have stayed elevated due to global supply chain disruptions and geopolitical tensions, especially those involving major energy suppliers. Meanwhile, the eurozone has long struggled with slow economic growth. This year, the region’s GDP growth has been sluggish, with some member states on the brink of recession. Germany, the largest economy in the eurozone, has been particularly affected by declining industrial output and weak exports. This slowdown has been exacerbated by global economic uncertainties, including trade tensions, weak recovery in China, and the ongoing conflict in Ukraine, which continues to disrupt energy markets and consumer confidence.

Due to the increasingly tense geopolitical relations between the U.S., China, and the EU, international trade tensions have continued to rise, slowing the process of economic globalization and leading to a more divided world. Geopolitical conflicts are reshaping the global economic landscape. Last spring, while the World Trade Organization (WTO) was optimistic about the recovery of global trade, it also warned that geopolitical risks were increasing. Since then, international trade tensions have escalated, and relations between the U.S. and China, as well as between the EU and China, have grown more strained. For example, in the South China Sea, U.S. Secretary of State Antony Blinken stated at the annual ASEAN (Association of Southeast Asian Nations) summit on Friday, October 11, that the U.S. is concerned about China’s “increasingly dangerous and illegal” activities in the disputed waters. He pledged that the U.S. would continue to uphold freedom of navigation in this crucial maritime trade route. In recent months, disputes and conflicts in the South China Sea have become more intense and frequent. This body of water lies on the edge of the Western Pacific, and three of the world’s largest economies—China, Japan, and India—are located along this key trade route. While exact trade data for the South China Sea is not yet fully available, CNBC reports that the China Power Project at the Center for Strategic and International Studies (CSIS) in Washington estimated that trade passing through this region in 2016 amounted to $3.4 trillion, accounting for 21% of global trade.

The United Nations Conference on Trade and Development (UNCTAD) estimated that maritime trade through Asia made up 60% of global seaborne trade that year, with the South China Sea accounting for one-third of global shipping volume. Earlier this month, the Philippines accused a Chinese warship of chasing its vessels and firing a laser at a patrol aircraft near the disputed Half Moon Shoal. According to Philippine officials, other incidents had previously occurred, including ship collisions, water cannon attacks, and injuries to Filipino sailors. Half Moon Shoal is an atoll located at the eastern end of the Spratly Islands in the South China Sea (referred to by China as the Nansha Islands). China, the Philippines, Taiwan, and Vietnam all claim sovereignty over the atoll. Philippine President Ferdinand Marcos raised the issue at the ASEAN summit on Thursday, calling for countries involved to speed up negotiations on a code of conduct for the South China Sea, while condemning Beijing’s harassment and intimidation. Meanwhile, Vietnam’s Ministry of Foreign Affairs recently criticized China’s actions in the South China Sea, accusing Chinese vessels of “violent attacks” on Vietnamese fishing boats. CNBC quoted Richard Heydarian, a policy advisor at the University of the Philippines and senior lecturer in international affairs, saying, “In recent weeks, we’ve seen tensions not only between China and the Philippines intensifying but also between China and Vietnam.” Heydarian believes that “it’s only a matter of time before more ASEAN countries speak out, and we’ll see more unsettling conflicts—it’s only a matter of time,” he added. Blinken, representing U.S.

President Joe Biden at the ASEAN summit in Vientiane, Laos, told Southeast Asian leaders that advancing the shared vision between the U.S. and ASEAN means tackling the common challenges that vision faces, including some of China’s actions. Blinken said, “We remain concerned about China’s increasingly dangerous and illegal actions in the South China Sea and the East China Sea, which have caused injuries to personnel and damaged ships of ASEAN nations, violating commitments to peacefully resolve disputes.” He added, “The U.S. will continue to support freedom of navigation and overflight in the Indo-Pacific region.” Blinken reiterated these points at the East Asia Summit, again highlighting China’s “provocations” in the South China Sea and East China Sea, as well as emphasizing the importance of peace and stability across the Taiwan Strait.

The Russia-Ukraine conflict has played a significant role in a violent and bloody confrontation. As far back as her time as Chancellor, Merkel repeatedly warned Europe that NATO’s eastward expansion could provoke unnecessary conflict, particularly with Russia, which could bring immeasurable risks. She was once seen as overly cautious, but after the outbreak of the Russia-Ukraine war, her predictions proved to be remarkably accurate. With the conflict’s onset, Europe not only failed to achieve a sense of “security” but instead fell into an energy crisis. Despite swift sanctions from many European countries to pressure Russia economically, the sanctions exacerbated the near standstill in energy trade between Russia and Europe, with the once crucial “Siberian Power” pipeline becoming a gas cutoff blade threatening Europe’s energy security. Worryingly, the sanctions have not achieved the expected results. Despite rounds of Western sanctions, Russia’s economy has shown resilience. After losing the European market, Russia quickly adjusted its strategy, significantly increasing oil exports to Asian countries, particularly China and India. According to the International Energy Agency, Russia’s crude oil export revenue reached $218 billion in 2022, up 20% from 2021. This forced Europe to turn to the U.S., Qatar, and other countries for liquefied natural gas (LNG) to fill the gap. However, U.S. LNG is not cheap. In their desperation, European countries had no choice but to accept the high import costs, which were directly passed on to ordinary citizens. As a result, heating costs for European households soared, with some people even having to make tough choices between heating and other basic living needs. In its efforts to break free from dependence on Russia, Europe has inadvertently fallen into a new dilemma. Soaring heating costs, rising living expenses, and ongoing social unrest are putting more pressure on Europeans. The Russia-Ukraine conflict caused natural gas prices in Europe to skyrocket, reaching up to 300 euros per megawatt-hour, nearly ten times pre-war levels at their peak. Cold data, but it best illustrates the problem. Amid energy shortages, European countries have implemented electricity and energy-saving policies one after another, but the results have been underwhelming. As winter approaches, heating has become a central concern for both governments and the public.

According to Eurostat data, the inflation rate in the eurozone reached 10.6% in 2022, a record high. Prices of milk, bread, and eggs in supermarkets continue to rise, and what was once the middle class now feels the heavy pressure of the economy. Especially in the context of frequent small business closures and rising unemployment, life is even harder for those at the bottom, with many forced to pinch pennies to meet basic needs. For many small businesses, the expensive energy costs were the final straw. Facing rising operating costs and shrinking market demand, many companies had no choice but to close, triggering a wave of unemployment and further exacerbating social instability in Europe. Merkel’s past warnings seem to have become a reality, leaving Europe facing an inescapable predicament.

Another factor is the weak recovery of China’s economy. The National Bureau of Statistics of China released data on Friday, October 18, showing that China’s Gross Domestic Product (GDP) grew by 4.6% year-on-year in the third quarter, down from 4.7% in the second quarter, marking the slowest growth rate since the beginning of 2023. China is introducing a series of stimulus measures to stabilize the sluggish economy, which has been weakened by poor consumption and a real estate crisis. The figures released on Friday were slightly higher than the 4.5% expected by analysts surveyed by AFP and Reuters. This has resulted in China’s economic growth rate falling below the annual target of 5% for two consecutive quarters.On September 26, China’s top decision-making body held a meeting focusing on addressing the difficulties in the current economic situation. It acknowledged new circumstances and challenges in economic operations and decided to deploy “necessary fiscal expenditures” to strive to achieve this year’s growth target of around 5%. China’s vast real estate sector is in an unprecedented crisis, with weak confidence among households and businesses, which has affected consumption. Geopolitical tensions with Washington and the European Union also threaten China’s foreign trade. In response to this, the Chinese government has introduced a series of stimulus measures aimed at boosting finance and the economy, leading to volatility in the stock market, testing the wallets and patience of investors and consumers.

Despite these challenges, some positive signs have emerged. In September, retail sales, which reflect household consumption, grew by 3.2% year-on-year, higher than August’s 2.1%. At the same time, the urban unemployment rate slightly decreased, from 5.3% in August to 5.1% in September. The average unemployment rate for the first three quarters was 5.1%, down 0.2 percentage points from the same period last year. On Friday, the National Bureau of Statistics stated that China’s economy currently faces a “complex and severe external environment” and “new development challenges.” These challenges are mainly reflected in the weak performance of inflation, investment, and trade. In particular, the real estate sector, once a major driver of China’s economic growth, remains sluggish. Property developers are deeply mired in debt crises, and unfinished construction projects and falling housing prices have further exacerbated the crisis. To counter the economic slowdown, Beijing has recently introduced several stimulus measures, including interest rate cuts, easing home purchase restrictions, and boosting financial market liquidity. The government injected 200 billion yuan in funding for support, and the governor of the People’s Bank of China, Pan Gongsheng, announced on Friday that the reserve requirement ratio (RRR) for banks may be lowered again before the end of the year to release more loan funds and further support the real economy. Additionally, on Friday, China’s major banks announced a “cut in yuan deposit rates,” marking the second rate cut this year, aimed at stimulating consumption and investment by lowering savings returns.

The actions of the European Central Bank (ECB) must be viewed within the context of global monetary policy trends. Central banks around the world, including the U.S. Federal Reserve and the Bank of England, face similar challenges as they attempt to strike a balance between controlling inflation and sustaining economic growth. However, the eurozone faces unique structural challenges, such as high public debt levels in some member states and deep political divisions over fiscal policy, making it difficult for the ECB to achieve a smooth economic recovery.The decision to cut interest rates highlights the severity of the economic challenges in the eurozone. Despite inflation remaining above target, economic growth has stagnated, leading the ECB to adopt an aggressive stimulus strategy, betting that rate cuts will provide the necessary boost to economic activity. However, the risks associated with this strategy—especially runaway inflation and the erosion of savings—cannot be ignored.

The ECB is in a dilemma. On one hand, persistent inflation has eroded household purchasing power, particularly for low-income families, weakening consumer confidence. On the other hand, overly aggressive rate hikes could stifle economic growth, as higher borrowing costs reduce investment and consumer spending. This delicate balance makes the ECB’s task particularly challenging, as it must find a way to strike a balance between controlling inflation and supporting economic growth. The eurozone’s economic growth remains especially weak, with GDP growth forecasts for 2024 being continuously revised downward. Industrial production is sluggish, particularly in key economies like Germany, where energy shortages and declining global demand have severely impacted growth. A report by Germany’s renowned Kiel Institute for the World Economy predicts that Germany’s GDP will shrink again this year, contracting by 0.1% compared to 2023. The forecast for Germany’s economic growth in 2025 has also been downgraded from 1.1% to 0.5%. In 2023, Germany’s GDP contracted by 0.3%, making it the only economy in the G7 to shrink last year. The International Monetary Fund (IMF) is also pessimistic about Germany’s growth prospects this year. In January, the IMF predicted Germany’s economy would grow by 0.5% in 2024, but in July, this estimate was lowered to 0.2%, suggesting that Germany may perform the worst among the world’s major economies. A series of data points indicate that Germany is sinking further into economic difficulty, with a sluggish recovery ahead. Ding Chun, director of the Center for European Studies at Fudan University, told China News Service that Germany’s recession is driven by both temporary and structural issues. According to Ding, the temporary causes stem mainly from Germany’s heavy dependence on Russian energy, which led to energy supply shortages following the outbreak of the Ukraine crisis. This triggered high inflation, raising costs and weakening consumer spending. As energy prices soared, German companies, especially those in energy-intensive industries, faced sharp cost increases, resulting in production cuts, closures, relocations, and layoffs, all of which impacted the broader economy. The structural causes relate to fundamental problems in Germany’s economic model, which suffers from several structural weaknesses. These include insufficient innovation potential, a shortage of qualified labor due to an aging population, and a long and challenging energy transition exacerbated by the Ukraine crisis. This combination of factors poses serious challenges to the German economy. In addition, external factors such as weak global demand have further aggravated Germany’s economic woes. Other member states, such as Italy and Spain, also face high levels of public debt and weak economic activity, further complicating the overall economic situation in the eurozone. According to AFP, the latest analysis from the International Monetary Fund (IMF) warns that by the end of this year, global public debt will reach $100 trillion, representing 93% of global GDP, and cautions that the fiscal outlook for many countries could be “worse than expected.” In its latest Fiscal Monitor report, the IMF projects that by 2030, global debt will approach 100% of GDP, warning that governments will need to make tough decisions to stabilize borrowing. Debt is expected to rise in countries such as the U.S., Brazil, France, Italy, South Africa, and the UK, with the IMF urging governments to control debt levels.

This economic stagnation, coupled with concerns about a potential recession, has put pressure on the European Central Bank (ECB) to shift its policies. By cutting interest rates, the ECB aims to lower borrowing costs, theoretically stimulating business investment and consumer spending. Lower rates allow businesses to borrow more cheaply for capital investments, while consumers benefit from reduced mortgage and loan rates, boosting demand for housing, durable goods, and other major consumer products. Throughout 2023 and 2024, rising borrowing costs have weighed on economic activity. Higher interest rates have increased the cost of servicing national debt, particularly for heavily indebted countries like Greece, Italy, and Spain. The ECB’s rate cuts are designed to ease this burden, lowering overall borrowing costs and freeing up more capital for investment in critical infrastructure, public services, and economic development projects.

One of the most immediate impacts of the ECB’s rate cuts will be felt in financial markets, as lower interest rates typically reduce the yields on government and corporate bonds. This could have multiple effects. On the one hand, lower yields reduce borrowing costs for governments and businesses, potentially stimulating infrastructure investment and corporate expansion. On the other hand, investors seeking higher returns may shift their capital out of the eurozone in search of better yields elsewhere, which could weaken the euro and raise the cost of imports. While a weaker euro could benefit export-driven industries, it may also further fuel inflation by increasing the cost of imported goods and raw materials, including energy. For businesses, especially capital-intensive sectors like manufacturing, real estate, and construction, lower rates will alleviate the pressure caused by rising borrowing costs. Many companies had delayed investment decisions due to high interest rates, and the ECB’s rate cuts could unleash pent-up demand, driving expansion, new projects, and hiring. This could help stabilize the labor market, which has shown signs of weakness in recent months. Youth unemployment, particularly in countries like Spain and Italy, remains persistently high.

For consumers, the ECB’s rate cuts will directly impact loan and credit card interest rates, potentially stimulating consumer spending. However, high inflation continues to strain household budgets, especially for essential items like food and energy. While lower borrowing costs may provide some relief, rising living expenses remain a significant issue for many European families, particularly those with low incomes.

A report from Spain’s Ministry of Agriculture shows that global olive oil prices had already reached a new high of 8,400 euros per ton at the beginning of September, setting a new record. In August, the average global price of olive oil had risen by 130% compared to the same period last year, and the increase continues. Pablo, a manager of a local olive oil production plant in Spain, told China Central Television (CCTV) in an interview that climate-related reductions in production have made business increasingly difficult in recent years, and the quality of olives has also declined, leading to lower oil yields. Since the outbreak of the Russia-Ukraine conflict, inflation has caused operating, labor, fertilizer, plant protection products, and transportation costs to surge, forcing them to raise the price of olive oil. Unfortunately, these increases have to be passed on to ordinary consumers. For example, the retail price of their one-liter bottle of olive oil, which used to be around 2.5 euros per bottle, has now risen to 10 euros per bottle.

There are also political divisions among countries regarding the European Central Bank’s (ECB) interest rate cuts. Some eurozone governments, particularly those with high debt levels, support the ECB’s actions. Countries like Italy, Spain, and Greece face significant fiscal pressures, and lowering borrowing costs would ease their debt burdens by reducing the cost of servicing their debt. Lower interest rates also give these governments more fiscal space to implement economic stimulus measures, such as public investment and social welfare programs, to support their economies during periods of slow growth. In contrast, governments that favor more conservative fiscal policies, such as Germany and the Netherlands, have been critical of the ECB’s approach. These governments have long advocated for tighter monetary policies to control inflation and prevent excessive borrowing. They argue that the ECB’s repeated rate cuts could fuel financial imbalances and asset bubbles, particularly in the real estate market. In Germany, for example, there are concerns that ultra-low interest rates will continue to drive up housing prices, making homeownership increasingly unaffordable for many families.

This is the third rate cut by the ECB this year. The first two rate cuts took place in June and September respectively. The ECB’s reason for the rate cut is still “controlling inflation and stimulating the weak economy.” At the same time, the Federal Reserve just started its “late” interest rate cuts in September, and Europe’s “accelerated interest rate cuts” seem to have caught the Federal Reserve off guard. Generally speaking, the monetary policies of the United States and Europe always keep a certain pace, but this year, this “tacit understanding” has been completely broken. The independent pace of the European Central Bank reflects the eurozone’s helpless move in the face of economic recession and also puts the Federal Reserve under greater decision-making pressure. In this case, the Fed’s interest rate meeting in November becomes particularly critical. The pace and magnitude of interest rate cuts have become a “barometer” for the global market. But for the Fed, the complexity of the problem is far more than that – now they have to face a political struggle of “internal and external troubles”. The US election in November is approaching, and various forces are exerting influence on the Fed. Trump publicly called for a sharp interest rate cut several months ago, while the current government hopes to “stabilize the basic economic situation.” It is still unknown what the Fed will choose, but no matter what it chooses, it will affect the economic situation in Europe.

By Chenhao Zhan