But this factor is less relevant in the euro area, since many money market funds have been operating as Variable Net Asset Value funds, and therefore are more flexible to extend duration to seek additional returns. Furthermore, the euro area is a relatively open economy for its size, with total trade making up 51% of GDP,16 compared with 27% in the United States.
This means that the impact of negative rates on inflation and financing conditions via the exchange rate is more powerful. In short, faced with a new environment of downside risks and limited conventional policy space, the ECB showed that it had no shortage of tools available to respond.