Remember that BBC quiz show with the notoriously blunt Anne Robinson, who ended each round with the line, “You are the weakest link. Goodbye”? In The Weakest Link, the contestant deemed weakest by the others was eliminated—on the logic that a weak player could damage the prize pot. That sounds rather economic. So why is the European Central Bank (ECB) doing the exact opposite?
Despite eurozone inflation staying above 2 percent since June 2021—with the sole exception of September 2024—the ECB has already cut rates three times this year. Based on market expectations, two more cuts are likely before year-end, which would bring the deposit rate down to a meager 1.75 percent.
That rate is already low for a region experiencing 2.2 percent inflation, but it’s completely out of line for a country like the Netherlands, where inflation is currently running at 4.1 percent. Dutch savers are earning roughly 1.25 percent interest at the three major banks—meaning the banks are pocketing an extra percentage point in margin. Add inflation to the mix, and it’s clear what’s happening to the so-called “fantastic pot” of 600 billion euros in savings.
Debt mountain rules!
Why is the ECB’s rate so low—and still falling? The Federal Reserve, by contrast, has made its position clear: the lack of transparency around the economic impact of trade tensions means the only rational move is to wait. The Fed is doing just that with rates at 4.5 percent, even though inflation in the U.S. stands at 2.4 percent—barely higher than in the eurozone.
The answer lies in a kind of inverse version of The Weakest Link. In the eurozone, it’s not “goodbye” for the weakest, but “hello.” So, who’s the weakest link? That would be France. While Italy’s debt-to-GDP ratio is higher at 135 percent versus France’s 113 percent, France’s fiscal position is even more of a mess. The latest French government—one in a long line—is now “hoping” (and that’s all it is) to bring the deficit below the 3 percent threshold by 2029. Don’t count on it.
Inflation in France currently sits at just 0.8 percent. That’s great news if you’re setting monetary policy around the country most at risk when rates rise—and the country with the fastest-growing debt pile. That inflation hasn’t yet reached the 2 percent target is treated as a footnote. So is the erosion of purchasing power for 18 million Dutch citizens watching their savings lose value.
No surprise
This ECB policy stance should come as no surprise. Since Mario Draghi famously declared he would do “whatever it takes” to save the euro—calming markets and preventing countries like Greece and Italy from being ejected from the monetary union—it has been obvious that the ECB’s primary concern isn’t controlling inflation. It’s holding together a flawed and incomplete monetary union, riddled with structural differences between member states.
Take the ECB’s Transmission Protection Instrument (TPI), for instance. It has been established but not yet deployed—and it’s a complete black box. ECB President Christine Lagarde has already stated that she will not provide any transparency about what goes on inside the TPI. Its aim? To prevent excessive interest rate spreads between eurozone countries.
But what should a country with 113 percent debt-to-GDP, a negative credit outlook, growth potential well below 1 percent, and a budget deficit approaching 6 percent of GDP be paying to borrow? A yield of 3.30 percent seems more than generous.
Then again: “You are the weakest link. Goodbye” simply doesn’t fly in the eurozone.
Jeroen Blokland analyzes eye-catching, timely financial market and macroeconomic charts in his newsletter The Market Routine. He is also the manager of the Blokland Smart Multi-Asset Fund, which invests in equities, gold, and bitcoin.