The Corner

Negative Interest Rates – Adding to Germany’s Discontents?

One of the features of what passes for monetary policy these days is the willingness of some central banks to cross the ‘zero lower bound’. Translated from the jargon, what that means is negative interest rates.

Bloomberg has a brief introduction to this idea here.

An extract:

The Bank of Japan surprised markets by adopting negative interest rates in January, more than a year and a half after the European Central Bank became the first major institution of its kind to venture below zero. With other options to stimulate the economy limited, more policy makers are willing to test the technique. They acknowledge that sub-zero rates can crimp the ability of banks to make money or lead them to take additional risks in search of profit.

The ECB cut rates again March 10, charging banks 0.4 percent to hold their cash overnight. At the same time, it offered a premium to banks that borrow in order to extend more loans. Sweden also has negative rates, Denmark is using them to protect its currency’s peg to the euro and last year Switzerland moved its deposit rate below zero for the first time since the 1970s.

Janet Yellen, the U.S. Federal Reserve chair, said in November that a change in economic circumstances could put negative rates “on the table” in the U.S. Since central banks provide a benchmark for all borrowing costs, negative rates spread to a range of fixed-income securities. By February, more than $7 trillion of government bonds worldwide offered yields below zero. That means investors buying bonds and holding to maturity won’t get all their money back. While most banks have been reluctant to pass on negative rates for fear of losing customers, a few began to charge large depositors.

There are many reasons why negative rates are a terrible idea, but they are, I suppose, the logical end-point of a policy under which central banks have been pushing interest rates to levels well below any convincing connection to economic reality. That’s a policy that is, I suspect, stirring up significant trouble for the future, but, after reading this account in Germany’s Handelsblatt, it’s also hard not to wonder whether ultra-low interest rates might be doing their bit to contribute to the souring political mood in that country. 

Here’s an extract:

Where the ECB’s [European Central Bank] policies are really being felt are in the 20 million-plus homes and apartments spread across Germany, where befuddled savers are confronting a world out of balance, where saving money is suddenly no longer a German virtue, but a fool’s game for elderly Omas and Opas [grandparents] without a clue. The low-interest escape from a currency meltdown has decimated German savers’ tried-and-true forms of low-risk investment.

Amid ongoing negative interest rates, almost 80 percent of German government bonds are now bearing negative interest, a total volume of €880 billion, according to data from Bloomberg.

Across the euro zone, there are €3.3 trillion worth of bonds with negative yields. In Germany, savers have packed €2 trillion into time deposits, current and savings, almost a third of all savings deposits in the euro zone. But most people are earning little if any interest on this money. Mr. Draghi’s lax monetary policy is a frontal attack on German savers, even if it was never intended to be. German fund manager Union Investment estimates German households will lose €224 billion in interest over the next five years. And even this bleak outlook is based on the assumption that interest rates will be only 2 percentage points below the long-term average, which is very optimistic.

Low interest rates have also pushed up the price of pensions in recent years.

Olaf Stotz, a professor of asset management at the Frankfurt School of Finance, calculates that a 35-year-old man on an average income with a life expectancy of 79 years would have had to put aside €168 a month in 2007 to maintain his standard of living in retirement. In 2015, he would have needed to put aside more than twice as much – €360 per month. That is equivalent to an annual increase in costs of 13.5 percent since 2008, which Mr. Stotz describes as “nothing other than inflation.”

While the ECB’s lax monetary policies are exasperating savers, they are good news for borrowers, particularly for countries with high levels of debt.

Germany’s DZ Bank calculates that the burden on Italy’s national budget was reduced by €53 billion between 2012 and 2015 thanks to the so-called Draghi effect. In contrast, Germany’s finance minister, Wolfgang Schäuble, has saved only €9.5 billion in interest payments since 2012.

One of Germany’s leading conservative economists and a persistent critic of Mr. Draghi and the ECB’s low-interest strategy is Hans-Werner Sinn, the head of Munich’s Ifo Institute for Economic Research. Mr. Sinn has called Mr. Draghi’s strategy “the biggest redistribution of wealth in Europe since the post-war era.” Wealth is being redistributed, Mr. Sinn has argued, from creditors to debtors, from financially strong to financially weak companies, and from rich to poor economies, without any parliamentary vote.

Without any parliamentary vote.

Post-democracy is what it is. 


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