German savers should fear Berlin, not the European Central Bank

German savers

Given current interest rates, and given current price trends, real interest rates are at this point negative across Europe. Meaning, of course, that if you intend to keep your savings in a bank deposit, chances are that low nominal yields minus the low European inflation rate will have eroded the real value of your capital at the end of the deposit term.

Spain, formerly a powerhouse of inflation, did experience this problem for long periods. Bank saving seemed a silly thing to do. We could not imagine that the same problem would pop up again in an environment where inflation and interest on bank deposits took extremely low values.

Christian Siedenbiedel elaborated on this worrying situation in a recent column (FAZ, May 26). “Worrying” applies to German savers only. He makes two points, and each of them calls for a specific footnote.

The average German saver is terribly conservative, and bank deposits are still their favorite investment, in case “investment” is the right word to describe so limited an approach to the financial world. Aside from losses on under-the-mattress holdings of cash, Siedenbiedel calculates a substantial yearly drain of almost €60 billion.

Many other alternatives to bank deposits are available, to be sure, associated to varying levels of risk. Say, a mixed portfolio of sound European corporates–rated below triple A–and of European sovereign debt–all current, even if well below top ratings–may yield around 5% and thus leave a real return of 3.5%. Mutual funds, corporate stock or hedge funds would of course promise higher returns commensurate to the different grades of risk.

If savers want to disregard the wide offer available from financial institutions and stick to their usual template, it is their business and that’s it. What I find inappropriate is to talk about expropriation of savings when savers willingly plump for the investment modality that is most likely to put you in the red. Readers should note that–following this logic–the German government could also be drawn in as an expropriator of sorts: it is still an issuer of debt at a real yield equally negative for their nationals.

Now, the background to this situation appears to be the cheap money policy followed by the European Central Bank ever since the onset of the crisis. Let’s make sure we get this. The headline to the piece by Siedenbiedel runs “this (=real-interest losses on savers) is the price for rescuing debtor countries” …Is it really? Is ECB’s monetary policy set by the requirements of countries in difficulties?

Euro-area indicators show that the overall economy is in the doldrums, while current inflation and expected trends are below or around the 2% objective set by the ECB. If inflationary expectations were on the way up there would be a conflict for economic policy, but this is not the case (at least before 2017). Now, this is the picture that typically calls for cheap money policies. It is not fair to argue that indebted countries are intended beneficiaries of the current monetary policy. Their market issues bear a premium on the Bund which has little to do with the banking rates set by the ECB. In fact, these premia have shrunk thanks to the open commitment made by the ECB in September last year, not to its conventional interest rate adjustments.

A little grain of irony is perceptible here, because many German analysts, the Bundesbank at the forefront, firmly assert that the commitment to do “whatever it takes” does not pertain to the field of monetary policy and therefore, exceeds the legal competence of the ECB (a point made by the Bundesbank in their opinion to the Constitutional Court on the current case ESM/ECB). Art 127 of the TFEU also requires the ECB to support the general economic policies and objectives of the Union, among whom–obviously–the defence of the common currency by one the members, the ECB, should be prominent.

It is a bit distressing to notice how little tolerance receives the ECB in German media. If the ECB deviates from full orthodoxy to contain escalating risk premia, it’s heads you lose: Mr Draghi’s initiative cannot be regarded as monetary policy. When the ECB sets its rates with an eye on the poor performance of the Euro-area as a whole, it is monetary policy all right–but anyway, it’s tails I win: that is the wrong monetary policy, or worse still, it is an accommodating policy for the convenience of some of the members. Regrettable, and unfair.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

1 Comment on "German savers should fear Berlin, not the European Central Bank"

  1. The current low ECB prime rate benefits only the commercial banks, which lend this money cheaply obtained from the ECB very dear to the governments of the South and to main street -including Germany?

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