Negative interest rates are an unconventional monetary policy tool. They were first deployed by Sweden’s central bank in July 2009 when the bank cut its overnight deposit rate to -0.25%. The European Central Bank (ECB) followed in June 2014 when it lowered its deposit rate to -0.1%. Other European countries and Japan have since chosen negative interest rates resulting in $9.5 trillion worth of government debt carrying negative yields in 2017, according to Fitch. Negative interest rates are a drastic measure that shows that policymakers are afraid that Europe is at risk of falling into a deflationary spiral. In harsh economic times, people and businesses tend to hold on to their cash while they wait for the economy to improve. But this behavior can weaken the economy further, as a lack of spending causes further job losses, lowers profits, and reinforces people’s fears, giving them even more incentive to hoard.

In theory, banks would rather lend money to borrowers and earn at least some interest as opposed to being charged to hold their money at a central bank. Additionally, negative rates charged by a central bank may carry over to deposit accounts and loans. This means that deposit holders would also be charged for parking their money at their local bank while some borrowers enjoy the privilege of actually earning money by taking out a loan.

Another primary reason the ECB has turned to negative interest rates is to lower the value of the euro. Low or negative yields on European debt will deter foreign investors weakening demand for the euro. While this decreases the supply of financial capital, Europe’s problem is not one of supply but of demand. A weaker euro should stimulate demand for exports and, hopefully, encourage businesses to expand.

In theory, negative interest rates should help to stimulate economic activity and stave off inflation, but policymakers remain cautious because there are several ways such a policy could backfire. Because banks have certain assets such as mortgages that, by contract, are tied to the interest rate, such negative rates could squeeze profit margins to the point where banks are actually willing to lend less. While negative interest rates may seem paradoxical, this apparent intuition has not prevented a number of European central banks from adopting them.

For example the world’s longest experiment with negative interest rates may end up lasting an entire decade in Denmark. Not until 2021 at the earliest will Danes have a chance to see positive rates again, according to Danske Bank. The country’s policy rate first dropped below zero in 2012. Nowhere else have people lived with negative interest rates as long as in AAA-rated Denmark. The policy has protected the currency peg, but it’s also turbo-charged the mortgage market and pushed those trying to save money into riskier assets. Meanwhile banks have done a bit less traditional lending and a lot more wealth management.

Personally I think that Europe has entered uncharted monetary territory, and I agree with a number of analysts that warn that negative interest rate policies could have severe unintended consequences. See the Belgian 10 Year Interest rate chart.