Does the nightmare of EU economy really end?

Does the nightmare of EU economy really end? Does EU economy actually recover? Are monetary policies employed by ECB  effective enough to solve EU economy? How will the world economy be if EU economy collapse? These are the crucial questions that people throughout the world are looking for the answers.
         
According to an article in BBC, writing in " ECB's Draghi sees recovery signs, as rates held at 0.5%" said the president of ECB, Mario Draghi, declared to keep interest rate at a historic low level of 0.5%, although there has gradual recovery signs in economy activity. His statement that rates would stay low because of reassuring market that ECB is not ready to follow the contraction policy of US Federal Reserve. Furthermore,  other  downside risks to EU economy are expected to be remained.

Before going any further, solid background of economic mechanism need to be provided. In terms of economy management, everything has trade-off. General speaking, in inflation targeting country which is the majority, when central bank plan to expand economy, they normally employ stimulation policy by reducing interest rate, in other words, center bank will inflate money into economy. On the other hand, if central bank plan to employ contraction policy, they will increase interest in order to get money out of economy. Because people will have more incentive to keep money in banks rather to spend on daily transaction or to invest. However, either increase or decrease interest rate, there are some opportunity costs. For example, when ECB decide to inject money into economy they will employ interest deduction. Yet, by using this policy means  the inflation rate will rise and tend to be above the targeting rate, which probably have a massively negative effect to overall economy. In addition, the government budget is limited and if government still continue employing this policy, its next option is borrowing. Then sooner or later its public debt will rise and eventually above its public debt ceiling  like what Greece and other EU countries are facing right now. On the other hand, if central bank decide to keep interest low, they will also need to trade off with slow down of economy as well. Therefore, it is important for policy maker to not only employ the right policy but also the right time period.

I think the main reason that ECB decide to maintain its interest rate at this low level because it believe that EU economy have not strong enough to stand alone without financial aid from central bank. Without this amount of money, its economy may likely seem to be in recession. However, personally I think it may be real challenge for ECB to stimulate EU economy by using inflating-money policy. Because nowadays the degree of openness among countries are more free. Money will flow to countries that give investors the highest return which are mostly in Asia. No matter how either US Federal Reserve or ECB will print money to their economy, some of those money will flow to Asia countries and cause the surpass and high inflation like what most Asia countries are facing currently.

The way that probably prevent those capital to flow out is ECB should increase rate of return. There are a number of way to achieve this. Firstly, increasing policy rate. However, like I did stated before, increasing interest rate may lead to recession if their economy have not been strong enough. What else that we can do!. ECB may cooperate with EU governments to employ fiscal policies. For example, increase productivity of good and be effective in using government budget. Rising tax perhaps is not a good choice for government to do so during given this current situation because their population already have a hard time of spending. In summary, recovery of EU economy is not something easy to be solve. It required both monetary and fiscal policy among EU countries to cooperate with each other. And hopefully some day those policy may work and recover their economy eventually.      

Reference

ECB's Draghi sees recovery signs, as rates held at 0.5%.(2013, August 1). BBC UK. Retrieved. August 1, 2013. http://www.bbc.co.uk/news/business-23527900