The end of the ECB's interest rate cut cycle, but the real challenges for the Eurozone are just beginning

The European Central Bank has ended its interest rate cut cycle, but this decision may mark the beginning of a deeper crisis. On Wednesday, economist Thomas Kolbe stated in a column that at the annual meeting held in Sintra, Lagarde announced that after eight rate cuts, the Eurozone policy rate has stabilized at 2%. She indicated that inflation levels have returned to around the 2% target, employment remains stable, and the risk of a new round of debt crisis is controllable. However, the reality depicted by the data tells a completely different story. The Eurozone's industrial sector continues to contract, the construction industry is deeply in recession, and over 50% of businesses are facing insufficient orders. Since 2021, German industry alone has laid off 217,000 workers, with an expected reduction of another 100,000 jobs by the end of the year. Meanwhile, the Federal Reserve maintains a high interest rate policy of 4.5%, providing space for the U.S. economy to clear inefficient capacity. This contrast highlights the Eurozone's dilemma in monetary policy choices and foreshadows increasing pressure for capital outflows. Neutral Interest Rate: The Illusory Commitment of Central Bank Narratives Kolbe stated that Lagarde emphasized the concept of "neutral interest rate" at the Sintra meeting, claiming that the European Central Bank has successfully balanced inflation and deflation pressures, guiding the Eurozone back to a growth trajectory. Executive Board members Joachim Nagel and Philip Lane have repeatedly conveyed this message in statements made in June. The so-called neutral interest rate refers to a level of interest rate that neither stimulates nor suppresses economic growth. In the central bank's narrative, the current 2% policy rate is close to this theoretical level, and market fluctuations around the equilibrium point are considered normal. This expression aims to convey stable expectations to the market, suggesting that the European Central Bank has found the optimal balance point for monetary policy. However, the reality of the economic process is far more complex than this simplified framework; the neutral interest rate is often a tool for the central bank to soothe government and market sentiments. Fiscal Original Sin: The Central Bank Becomes a Debt Supporter Kolbe further stated that the European Central Bank has long deviated from its original mission as a guardian of monetary stability. During the pandemic, the bank absorbed €1.85 trillion of Eurozone sovereign debt through the Pandemic Emergency Purchase Programme (PEPP) and still holds about one-third of the debt stock. Currently, the average public debt of Eurozone countries accounts for 100% of GDP, and most member states would face bankruptcy risks if they lost the support of the European Central Bank. This dependency means that the central bank must not only maintain monetary stability but also act as a stabilizer for the entire social model. Through indirect channels, the European Central Bank is effectively providing funding support for pensions, welfare budgets, and bureaucratic institutions in various countries, masking the fragility of the entire system. The central bank has become the last mortar holding this precarious structure together; once it withdraws, the entire house of cards will collapse instantly. Kolbe believes that this is why Lagarde and her colleagues must maintain the illusion of a controllable Eurozone. The Harsh Reality Revealed by Economic Data Behind the optimistic statements at the Sintra meeting, Eurozone economic data tells a different story. Industrial production continues to shrink, the construction industry is in deep recession, and more than half of businesses report insufficient orders Germany, the economic engine of Europe, is undergoing a process of deindustrialization. Production is shifting overseas, capital outflows are accelerating, and productivity has stagnated for eight consecutive years. This has led to the erosion of tax bases in various countries, a decline in fiscal revenue, and an increase in welfare spending, which has raised the debt burden. Kolbe believes that years of zero interest rate policies have immersed the Eurozone in the "sweet poison" of cheap credit. Now, faced with positive real interest rates, subsidy-dependent companies are beginning to collapse, and the characteristics of a "zombie economy" are becoming increasingly evident. The recent closure of Northvolt, a victim of green industrial planning, is an inevitable result of central bank planned economic policies. To make matters worse, the Federal Reserve's firm stance on maintaining a 4.5% interest rate level adds extra pressure on the European Central Bank. The United States is clearly prepared to accept positive market interest rates, providing space for the economy to clean up inefficient factors, allowing productive capital to be reallocated and driving a new round of investment cycles