Question

How has the European Central Bank influenced the growth of trade?

Answer 1

The European Central Bank literally sells government securities to big financial firms when the interest rate is risen. In turn, these securities are paid in Euros by the financial organizations. This efficiently reduces the quantity of currency in the economy that circulates. A decreasing supply results in higher demand and thus leads to an appreciation of the value of the Euro.

The European Central Bank floods the market with Euros when interest rates are lowered. This is done by buying securities from financial organizations from the government. In return for the securities, these banks and financial deals are paid in Euros, therefore increasing the supply of Euros in the economy. As supply increases, the value of the Euros depreciates.

Just months after policymakers chose to end their bond buying program, the ECB is returning to more financial assistance and expected to begin sewing off its crisis-era stimulus from the euro-area economy. Under the weight of trade tensions, a slowdown in China and the uncertainties surrounding Brexit, the export-dependent European economy buckled.

The primary move of the ECB was to revive its Targeted Longer-Term Refinancing Operations in order to encourage banks to provide loans to companies and clients. The loans will have a two-year period and the interest rate will be indexed over the lifetime of each procedure to the main refinancing rate. Similar to prior offers, there will be built-in incentives for the program to maintain favorable loan circumstances.

The ECB's commitment to more incentives to come is intended to increase trust and activity in the eurozone, which has been hit hard by the effect of the global economy's slowdown on its export industry. Recent industrial production figures from Germany–the powerhouse economy of the eurozone–have raised fears that development will slow down from the 0.4% reported in the first three months of 2019.