Europe’s Future Central Bankers Confront Draghi’s Dilemma
High school students from across the euro area spent the past six months analyzing the state of the 17-nation economy and preparing proposals on how Draghi’s European Central Bank should respond to the region’s debt crisis. The winners of the second annual “Generation Euro Students’ Award” will attend an awards ceremony hosted by Draghi in Frankfurt today.
“There is no clear solution,” Alejandro Goffa Martinez, a winning student at IES Josep Sureda i Blanes school in Palma de Mallorca, Spain, said in an interview. “The lack of credit is decisive because credit is the mechanism that is essential for growth. Lowering interest rates even more wouldn’t really help.”
Yet Draghi has signaled a rate cut is one of the few options left to the ECB as it struggles to find ways to boost lending in the recession-hit economy and doubts about a recovery grow. While students from euro-area periphery nations were mainly concerned about low interest rates failing to reach the economy, participants from the core warned against cutting borrowing costs further.
There is “no need or justification” for the ECB to cut its benchmark rate from 0.75 percent, already a record low, Finnish winners from Etelae-Tapiola High School in Espoo wrote in their essay for the competition. “A rate cut would have a momentary stimulating impact on the economy, but there are no grounds for a rate cut in the medium and long term.”
More than 3,500 students aged 16 to 19 from 11 euro nations participated in this year’s competition. The winners receive a trip to the Eurotower in Frankfurt, a handshake from the ECB’s president and small cash awards. Their tasks include completing a monetary-policy quiz, writing an essay predicting the outcome of an ECB policy meeting, and holding a presentation at their national central banks.
Today, the ECB also presented its third online game designed to increase knowledge about monetary policy in the region. “Top Floor - Make your way up!” is an interactive quiz targeted at 18 to 25 year-olds and is available on the central bank’s website in 22 languages.
Germany’s winning team in the Generation Euro contest started their analysis with the question of whether interest rates should be increased.
“Expansive monetary policy can lead to a lot of problems in the long term,” Lara Lechner, a 17-year-old student at Internatsschule Schloss Hansenberg, said in an interview. “But given the economic situation, an interest-rate increase is not an option at the moment,” she said. “Indicators would actually even support a cut, but rates are so low already that keeping them unchanged has similar effects.”
Martinez said he’s worried about the “huge” impact the lack of funding has on households and small businesses.
“Many of them had to close down in Spain,” he said. “Not necessarily because they weren’t solvent, but because they couldn’t continue their business without access to credit. This has led to job destruction and the economy’s current situation.”
The Spanish economy is struggling to recover from a six- year slump that’s left more than a quarter of the population without a job. The European Commission forecasts a contraction of 1.4 percent this year and an expansion of 0.8 percent in 2014.
Economists have brought forward expectations for lower interest rates after Draghi said on April 4 that the ECB “stands ready to act,” with 11 of 37 respondents in a Bloomberg News survey anticipating a cut in the second quarter.
“Lowering the benchmark rate is a very powerful tool,” Finnish students including Tatu Suontausta wrote. “Given that rates are at such a low level, this tool should be saved in case the situation suddenly deteriorates further.”
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