Negative Rates Should Prompt German Action, Not Angst
The European Central Bank's policy decision Thursday comes at a time of tension with Germany, its largest shareholder. German criticism of the ECB is not new, but the vehemence of recent attacks raises a difficult question: What happens if the euro's most important founding member loses faith in its independent central bank, or the currency project as a whole? Neither Germany nor the ECB can afford for that to happen.
When German Finance Minister Wolfgang Schaeuble recently blamed the ECB's monetary policies for half of the recent electoral gains won by the populist, anti-immigrant, anti-euro AfD party, he was expressing the view of a growing number of Germans. The latest Eurobarometer survey reported that 52 percent of the Germans do not trust the ECB, up from 21 percent before the financial crisis. If this trend continues, it's hard to see the euro surviving.
It's also hard not to sympathize with your average German. Low interest rates are a global phenomenon for which the ECB cannot be blamed, but they have hit Germany with particular force.
As a percent of disposable income, aging Germans’ savings are well below the euro-zone median. Germans also have been steadily deleveraging. They have among the lowest liabilities in Europe and so are not reaping the same benefits of today's rates in terms of lower interest payments as their neighbors. Moreover, German households invest proportionately far less in real estate, where prices are supported by lower interest rates, and relatively more in bank deposits, which no longer yield anything. Most Germans did not benefit from the wealth and income effect of the ECB’S measures, certainly not in comparison to their fellow Europeans.
Nobody could accuse ECB chief Mario Draghi of lacking either imagination or gusto. Faced with government inaction (low levels of public investment and rising debt) and an incomplete monetary union, the ECB was left with a weak hand to play. The problem arose when the ECB doubled down even as its policies failed to achieve the desired result. In the process, it has repeatedly rebuked its largest shareholder and supporter, providing fodder for the most successful anti-European party in Germany since World War II. In calling helicopter money a "very interesting" concept, Draghi may have wanted to show his flexibility; to Germans who have memories of hyperinflation, he exhibited recklessness.
If Schaeuble and Draghi have declared a partial truce, it is because both stand to lose a great deal. Diminishing popular support could lead to a formal German change of policy against what it increasingly regards as a currency managed against its national interest. Without the euro, export-led Germany would have to cope with a strong deutsche mark with all that implies for the valuing of its foreign assets, its financial sector and its manufacturing sector. Divorce may be worse than a bad marriage.
The ECB policies aggravated a pre-existing problem, alienating German voters and leaving the euro zone no better off. The solution, therefore, rests not with the ECB but with national governments who must agree to boost investment at home and at the European level. Doing so will require, at least temporarily, less concern about budget deficits -- something Germany has vociferously opposed. The ECB is unlikely to change course on Thursday. But Germany is wrong to lay the blame for its troubles at the feet of the ECB; both Germany and its European partners must do the heavy lifting themselves.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Jean-Michel Paul at JPaul@acheroncapital.com
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