BBC: European Central Bank cuts Interest Rates again … right after the EU’s Debt Bazooka of EUR 800 Billion

In concert with the EU leaders decision to get new debts of EUR 800 billion, the ECB lowered all key interest rates.
The BBC reports that “the ECB cut its main interest rate to 2.5% from 2.75%, and once again reduced its forecasts for economic growth in the eurozone.”
This move was mainly a reaction to Germany’s move to possibly increase drastically government borrowing by lifting the German constitutional debt ceiling. This German move triggered a vast sell-off of German government bonds.

“In response, longer term German bonds saw their biggest sell-off in years on Wednesday.

This pushed borrowing costs – as measured by the yields on the Germany’s 10-year bonds – up by biggest daily amount since May 1997.

On Thursday, German borrowing costs – as measured by the yields on the country’s bonds – continued to rise.

The increase has had a knock-on effect on other countries, with UK borrowing costs also increasing.”

The German deficit spending spree, as predicted, will raise Germany’s borrowing costs … with the same effect on other countries, like the UK. Therefore, the ECB reduced the key interest rates to make borrowing on the European markets less expensive.
This may also be the strategy for the big band deficit which the EU decided yesterday. Interests must be kept low, not only to avoid higher borrowing costs (which also will squeeze out private enterprises from capital markets), but also to stabilize the EURO, as the European currency suddenly increased, attracting many foreign investors into the new EURO government bonds.
This ECB interest slashing might well continue, in particular, in view of the monstrous deficit spending agreed yesterday by all EU leaders.
This deficit spending will be harmful for European savings as it is an anticipated tax or redistribution of wealth from the savers to government consumption. As well, the huge debt to be accumulated is another redistribution of wealth from later generations to today’s government consumption.

The ECB also issues a new economic forecast warning and reduces its expectations. While a deficit spending can have a growth effect (in line with Keynes), the following interest, currency, saving and investment disruptions may easily destroy any such Keynsian growth effect, in particular, as investments will not flow into productive assets but instead only into defense material and some non-productive infrastructure (which is the renovation of existing infrastructure). The financial markets have already priced in the expected future losses from the new deficits: the German sell-off and the increase of borrowing costs all over Europe is only the beginning.