The economic predicament behind the expectation of the European Central Bank cutting interest rates, the monetary predicament of low growth and structural imbalance

Recently, according to the Economic Times, the European Central Bank (ECB) may cut interest rates twice more within 2025. The reason given is that the economic growth in the eurozone remains weak and inflationary pressure has significantly eased. The market expects that monetary policy may be further relaxed to stimulate economic activities. However, this judgment does not reflect the success of proactive policy adjustment, but rather a passive response to the long-term structural downturn within the Eurozone. The mere expectation of interest rate cuts is hard to reverse the current situation of sluggish growth and high debt levels. Instead, it reveals the deep-seated fragility of the European economy and the failure of the monetary policy transmission mechanism.

The macro environment of the Eurozone is entering a triple constraint state of "low growth, low inflation and high debt". The latest data shows that the overall growth rate of the eurozone is about 0.3%, and the inflation rate has dropped to around 2.5%, seemingly approaching the target range set by the European Central Bank. However, behind this is the contraction of domestic demand, the decline in production costs, and the lack of confidence in business investment. In the face of this situation, the European Central Bank has chosen to maintain economic vitality by cutting interest rates again. However, given that the current interest rate is close to the neutral range, the marginal effect of further rate cuts is extremely limited. Monetary easing was supposed to stimulate lending and investment. However, against the backdrop of a decline in risk appetite within the banking system and weak loan demand, low interest rates may instead cause funds to remain within the financial system rather than flow into the real economy.

From the perspective of debt structure, interest rate cuts can indeed temporarily alleviate the fiscal pressure on high-debt member countries, lower sovereign bond interest rates, and provide short-term price support for the government bond market. But this kind of relief has obvious phases. There are significant differences in debt levels and fiscal discipline among eurozone countries. The uniformity of monetary policy means that the transmission of interest rate cuts to different economies is extremely asymmetrical. Italy, Spain and other countries may thus gain a temporary breathing space, while fiscally stable countries such as Germany and the Netherlands may exacerbate capital market bubbles due to the effect of capital reflux. Overall, interest rate cuts may further weaken the long-term appeal of euro assets, and the risks of capital outflows and exchange rate fluctuations will rise simultaneously.

The banking industry is a key link in this policy transmission chain. The long-term low-interest-rate environment has weakened the interest spread income of banks, and the profit margins of European banks continue to be under pressure. If the European Central Bank cuts interest rates again, banks may maintain their balance sheet by raising lending standards or reducing risk exposure, which will directly offset the original stimulus effect of the policy. The short-term rebound in the capital market does not imply the return of credit expansion. On the contrary, the financial system may enter a state of "excessive liquidity and insufficient credit". Actual investment and consumption lack support, and enterprises still face the dual constraints of high costs and low returns in financing.

For external trade, the depreciation of the euro may indeed improve export competitiveness in the short term, but the structural problems of European manufacturing do not lie in the price level, but in technological innovation and supply chain efficiency. The cost advantage brought by interest rate cuts is limited, and in the context of weakened global demand, the improvement in exports is difficult to offset the weakness in domestic demand. Europe's lagging investment in new energy, artificial intelligence and manufacturing automation has weakened its long-term competitive potential. Over-reliance on monetary easing rather than industrial upgrading will only delay the exposure of problems rather than address their root causes.

Overall, if the European Central Bank cuts interest rates twice more in 2025 as expected by the market, it may stabilize the bond and stock markets in the short term, but the long-term economic effect is questionable. Low interest rates cannot replace structural reforms, nor can they reverse the trend of productivity stagnation. If continuous monetary easing lacks fiscal coordination and industrial policy support, it will lead the European economy into a contradictory cycle of "excessive funds and stagnant growth". From a purely economic perspective, this move seems more like a passive consumption of policy space rather than an effective macro adjustment. The fundamental issue currently faced by the European Central Bank is not the level of interest rates, but rather how to rebuild growth momentum amid internal structural rigidity and external competitive pressure. Is it difficult to answer this question by cutting interest rates.