Germans bemoaning negative savings returns should look at Berlin, not Frankfurt
According to the popular narrative, the European Central Bank is the enemy of German savers
ECB president Mario Draghi has received criticism in Germany for the Frankfurt-regulator’s QE programme, which has impacted on interest rates. Photograph: Stephanie Lecocq/EPA
The State, which was locked out of financial markets almost a decade ago as the cost of bank bailouts soared, this week joined a growing club of European governments that can now borrow for the next 10 years and have investors pay for the privilege of taking their money.
The market interest rate – or yield – on the Government’s 10-year bonds dipped below zero for the first time ever on August 5th, before falling to as low as minus 0.07 per cent during this week. To put into perspective, the State was paying a rate of 4 per cent for 10-year money before the crash, while the yield soared to a peak of more than 14 per cent at the height of the crisis eight years ago.
It’s all good news for the National Treasury Management Agency (NTMA), which has to refinance more than €25 billion of bonds in the next 15 months and currently has a €5 billion annual interest bill.
But it’s not so good if you’re a saver.
And nowhere in Europe is the angst over negative interest rates more pervasive than Germany, home to the world’s best savers and Europe’s lowest government bond yields – currently at record lows of minus 0.6 per cent.
German households and non-profit organisations had €2.54 trillion of cash savings at the end of March, according to latest data from the country’s central bank. From Hamburg to Munich, civil servants to hausfrauen have consistently saved more than 8 per cent of their disposable income over the past two decades, according to data from the Organisation for Economic Cooperation and Development.
The conventional story is Germany’s savings culture is a legacy of how the nation was traumatised by hyperinflation and economic depression experienced between the two World Wars that paved the way for the Nazi regime.
But it runs much deeper than that. There were 300 thriving savings banks dotted around the country a century before the second World War broke out. Indeed, if you want to really understand German thinking around financial prudence, it’s captured in one word: schuld, which translates into both debt and guilt.
The enemy of German savers, according to the popular narrative, is the European Central Bank (ECB), based in the country’s financial capital of Frankfurt.
German media, economists and politicians routinely refer to negative interest rates as an ECB levy to punish the country’s savers.
ECB president Mario Draghi is looking at a number of options to reboot inflation in a flagging euro-zone economy
The headline of a piece in Die Welt last month screamed that negative rates amount to the “final expropriation of German savers”. Undoubtedly mindful of the view that low interest rates are fuelling the rise of the right-wing populist Alternative Fuer Deutschland (AfD) party, Angela Merkel’s successor-in-waiting, Annegret Kamp-Karrenbaur, pointed the finger at Frankfurt when she said in an interview last month that “the effect of these low interest rates are problematic” for a nation of money hoarders.
Meanwhile, the supreme court in Kahrlsruhe in the southwest of the country last month began hearing a case involving 2,000 plaintiffs challenging the ECB’s €2.6 trillion quantitative easing (QE) bond-buying programme of recent years. The programme, aimed at holding the euro zone together, has being the main driver of a lowering of bond yields.
The case is only the latest in a string of German lawsuits targeting ECB actions and comes after it stopped fresh QE purchases at the end of 2018. Outgoing ECB president Mario Draghi is looking at a number of options to reboot inflation in a flagging euro-zone economy, which could trigger a fresh round of QE.
A big reason why Draghi’s bazooka is being reloaded again is the weakening German economy itself. Figures released on Wednesday showed that industrial production in the country fell by 1.8 per cent in the second quarter of the year, leaving it teetering on the brink of recession. Trade data on Friday, revealing that German exports dropped 8 per cent on the year in June, have only added to concerns over the world’s fourth-largest economy.
As a trading powerhouse, Germany is particularly exposed to slowing global growth and geopolitical tensions such as the escalating trade war between the US and China. Ironically, the weaker the outlook, the more investors are piling into German bunds – seen as the safest of safe havens on the investment landscape in Europe.
But Berlin must accept its part in the economic malaise that has bedevilled the euro-zone economy since the onset of the debt crisis and is now coming home to roost.
A weakening of the euro against the dollar boosted the competitiveness of its exporters and helped deliver a budget surplus for Merkel for each of the past five years, including a record €59 billion excess last year, equivalent to 1.7 per cent of GDP.
While peripheral euro-zone economies have been under pressure to rein in budget deficits over the past decade, Germany, one of the few countries with what economists like to refer to as “fiscal space”, has refused to loosen its purse strings and invest and boost growth across Europe.
Draghi has been banging on for much of his eight years at the helm of the ECB about how governments that can afford it should spend and prop up growth – amid fears that political leaders are leaving it to central bankers to do the heavy lifting. His calls have fallen on deaf ears.
The burden has landed back at the ECB. Draghi, who at one stage thought he would be raising rates before his term ends later this year, has been forced into reverse. German savers looking for someone to blame for their predicament should be looking at Berlin, not Frankfurt.