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TheStreet Open House

Negative Deposit Rates in Europe Are Really Not Good News

NEW YORK (TheStreet) -- When was the last time you were offered a negative rate of interest on your deposits? In other words, you were guaranteed to lose money by having it in the bank?

The European Central Bank today announced that it had cut all three of its main interest rates. The biggest news, though, was that the deposit rate fell to -0.1%.

Yes, the ECB has become the first big central bank to charge banks for parking their money with it.

Most banks wants deposits, but the ECB wants something else: for European banks to lend money to help stimulate the European economy. The latest economic growth projections for the eurozone released in today's ECB press conference shows an anticipated 2014 growth level of 1% and sub-2% growth for 2015 and 2016 too. For a region that has horribly lagged growth rates in the U.S. over the last five years, that is a very unimpressive.

So Europe has slow growth. Does that really matter?

The world has lived with a slow-growth Japan for a quarter of a century now. The future is surely all about the emerging markets and especially China. Right? Maybe. Maybe not.

Europe does have challenges like an aging population that will crimp growth over time. But let's not forget the role of the region in adding to global economic uncertainty a few years ago, when fears of a eurozone breakup dominated financial sector headlines. European economic and political challenges inevitably make all global financial markets more volatile.

So are the actions by the European Central Bank today good news?

Well, it is good news that they are doing something.

But the reality of a negative deposit rate tells the financial markets observer that Europe is in a deeper economic hole than many would have thought. Ultimately more stimulus is likely -- after all, in the U.S. the Federal Reserve implemented QE3 before tapering even became a discussion point. The actions today are not really of the same magnitude as QE1. It is just a start.

Something else has got to give, and that is likely to be the value of the euro. In the near term, it is likely to continue the falls of the last few weeks. Prepare for the dollar to go up -- good news for your vacation abroad, less good news at the margin for American exporters.

Higher currency volatility is just the start of this. Europe's still-unhealthy economy is in a completely different place than the American economy, while its stock markets have been following the American market up. New stimulus efforts have now started in Europe, but it feels to me as if much of this has been anticipated. Sometimes it is easier to travel than arrive.

So keep an eye on Europe as a source of volatility for the world. Negative deposit rates just do not sound like good news, do they?

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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