Europe’s economy remains in the doldrums, and central planners there are hinting at fundamental Keynesian moves to weaken the euro, which, in their thinking, would stimulate growth in the eurozone by making European goods cheaper on the world market and foreign goods more expensive for Europeans.
European Central Bank president Mario Draghi recently hinted at two moves to lower the value of the euro: quantitative easing and cutting one of the ECB’s key interest rates to below zero. Lowering interest rates below zero has never been done by a major central bank and where it has been tried, Denmark and Sweden, the results were inconclusive.
If the ECB lowers its deposit rate, now at zero, to negative, banks would have to pay the ECB to park overnight funds at the central bank. In theory, this would encourage banks to lend more, which, according the Keynesian theory, would stimulate economic activity.
Quantitative easing would have the ECB buying government bonds on the open market with freshly created euros, thereby increasing the money supply, which, again according the Keynesian theory, would stimulate economic activity.
In the US, where QE has been employed since the 2008 Global Financial Crisis, the results have not been as hoped for, with the recovery being one of the weakest on record. Typically, coming out of recessions the US economy sees years with five, even six, percent growth. This recovery is struggling to achieve 3 percent growth.
As Europeans realize that the value of their currency is going sink, many will seek save havens for their funds. Some will turn to the dollar; others will buy gold and silver, which have been the world’s ultimate reserve currency for six thousand years.
If the ECB takes either step, the dollar will rise as the euro falls. Because gold and silver trade primarily against the dollar, a weaker euro will mean weaker gold prices, which will mean that gold and silver buyers will get more gold for their dollars.