Friday, June 24, 2016

My comments live on CNN right after the Brexit result was announced

The transcript of my CNN comments on Brexit in the early hours of June 24th, 2016:

QUEST: To the houses of parliaments now, Christiane Amanpour is there with guest.

And Christiane, one thought, though, no matter what the pundits and experts say, you know, tonight the people have spoken. They have made their decision. And the establishment may hate it, but they have to respect it.

AMANPOUR: Well, I mean, Richard, you are absolutely right. And therein, lies the dilemma. Because this is unprecedented, because it has never happened before, no country has ever withdrawn voluntarily from the European Union. We were going to be in a period of some uncertainty, which we we'll discuss with our guest here, about how it goes forward in the parliament behind me and how it goes forward in negotiations with Europe.

So, we're going to talk now quickly to Pieter Cleppe. Now, he is the Brussels Head of the office known as Open Europe.

Pieter Cleppe, thanks for joining me. In your heart of hearts, were you expecting this?

PIETER CLEPPE, OPEN EUROPE BRUSSELS OFFICE HEAD: I was definitely thinking it could be a possibility. The race was extremely tight.

AMANPOUR: What happens next? I mean, is it going to be Europe sort of, you know, getting ever closer, battening down the hatches, standing against Great Britain in order not to tempt other countries to do the same? Or is it Europe trying to do everything it can to make this easy for a Brexit Britain?

CLEPPE: I suspect the second will happen. You will see some instincts, especially at the E.U. level among E.U. commissioner officials, who think that now they should punish U.K. in a bit to try to avoid that other countries may consider leaving as well. But, of course, given the stakes, if you would restrict financial trade from the U.K. into the continent, you would actually drive up the cost of investment on the continent.

If Britain in retaliation would impose tariffs on, for example, German cars, this will, of course, cause a lot of damage for German industry. So you would see a massive development now to try to deal with this and to try to keep trade as open as possible. AMANPOUR: So that's for that aspect. What about the political aspect? Because all we have heard from European Leaders is that they are very concerned about a so-called "run on the bank". I don't mean literally, although you can see what's happening to the sterling right now. But in terms of other similar movements in Europe, doing the same kind of thing?

CLEPPE: Well, there's exchange rate volatility. But I don't think this is directly related to the health of the banking system. However, the political fallout will be enormous.


Basically, what has happened is that British people have not expressed so much desire against the idea of trades. Those ultimately responsible for all of this are to be found in Brussels. They have basically diverted a project that was oriented on removing trade barriers into something that was much more political, a project that was intent on mingling into national budget decisions into organizing transfers between European countries and even intermingling into what is a sensitive issue all over the world, asylum policy.

AMANPOUR: So we have already heard in the run-up to this vote the very powerful German Finance Minister, Wolfgang Schauble saying that there is not going to be an ever closer more Europe response to this. Because he said people will think we're nuts if we go into that. That we haven't heard what the British people have said. So what are they going to do? You just say, you know, it's up to Europe to fix itself. How will that happen? How can you see that happen? Is it possible?

CLEPPE: Well, European Council President Donald Tusk has already committed that within a few months there will be a major conclave to deal with the future of the European Inion. And then I think when the E.U. asks itself the question, "Why are we so unpopular?" The obvious conclusion is not that it provides a framework so cheap airlines can offer services all over the continent. People tend to like that aspect of the E.U. So the E.U. should keep that aspect.

But clearly, people don't like interventions into very sensitive national budget policy, which is closely interrelated with democracy, also transfers asylum policy. These kinds of aspects of the E.U. project should be ditched to put it bluntly.

AMANPOUR: Pieter Cleppe of the Open Europe there in Brussels, thanks for joining me. We go back to Hala and Richard in the studio now.

Friday, June 17, 2016

Brexit: Made in UK, designed in Brussels

Published on EU Observer

If the British vote for Brexit, the European Union will be reaping what it has sown.
In 1992, Denmark voted against the Maastricht Treaty, which established the possibility of creating a common European currency. In France's referendum on the same issue, only 51.1 percent voted in favour.
What if Europe’s leaders had listened to the doubts of their citizens and ditched the Maastricht Treaty?
The euro enabled countries to borrow more cheaply than they ever could have done without access to the ECB’s cheap financing. But this wasn’t a good thing.
It allowed Belgium, Greece and Italy to postpone necessary public sector reforms. As a result, the public sector and the public debt burden were allowed to grow even bigger.
It led to property bubbles and massive private debt in Ireland and Spain, which forced both countries to beg for a bailout. It led to transfers between countries, through the bailout funds and the ECB, and between taxpayers and banks. For example in Greece, the banks were able to dump a large part of their exposure on to eurozone taxpayers.

The common currency threatens the EU

The conditions linked to those transfers, in the form of a Troika or a Memorandum of Understanding, evoked a lot of anger in those countries forced to comply with the conditions.
Savers, insurance companies and pensioners in Germany, the Benelux and elsewhere have expressed their anger at the ECB using loose monetary policies, for example low and negative interest rates, to keep the euro project alive.
Italy’s GDP per capita is smaller than before it joined the euro. The “banking union”, common Eurozone regulation and supervision for banks, has the UK government worried about eurozone protectionism, fearing non-eurozone banks may one day no longer enjoy access to the single market without having to comply with eurozone rules.
In many countries, anger about the economic misery brought about by the euro debt machine translates into a vote for parties keen to leave the EU. In short, the common currency has ended up threatening the EU.

Anti-EU sentiment

Was the euro needed for countries to trade? No, it wasn’t. The UK, Poland and Sweden are happily trading without being a member. Was it needed to force a crisis which could then be abused to centralise power and organise transfers? Yes it was.
There were the referendums on the Nice Treaty, rejected by the Irish in 2001, the “European Constitution”, rejected by the French and the Dutch in 2005, and the Lisbon Treaty, rejected again by the Irish in 2008.
Time and again voters were asked to vote for a second time on these projects which boil down to transfers of power to the EU policy level, either in the form of scrapping vetoes or in the form of the development of new useless bureaucracies, such as an “EU Foreign Ministry” or “EU Council Presidency”.
Last year, the EU lost two referendums. In December, the Danes vote against handing over more powers for the country to be able to continue Europol cooperation, as demanded by the EU. The EU Commission responded that such flexibility was “impossible”.
In July, Greece rejected the terms attached to its third bailout package. This essentially boiled down to a vote for “Grexit”, something which could have been tried, given that the Greek banking system was frozen anyway. It could have meant an alternative to continued fiscal transfers and interventions into national budgetary decisions. Both have created a lot of discontent and anti-EU sentiment since 2010.

Scrap barriers to trade

Last year, there also was the decision to outvote Central and Eastern Europe on the sensitive issue of spreading out refugees, which isn’t even possible in a passport-free zone but which was decided to divert attention from criticism on Angela Merkel’s controversial refugee policy and to organise yet another transfer of power to the EU level.
Finally, this year, David Cameron’s proposals to bridge the gap between the EU and citizens were met with a lukewarm reaction. His proposal, for example, to allow groups of national parliaments to block EU proposals was watered down so as to make it almost impossible to be used.
Was it really so hard to listen to the population’s scepticism? A recent Pew poll has shown that a majority in EU countries want to return powers from the EU back to member states.
Few Europeans are annoyed that the EU makes sure Ryanair and Wizz Air are allowed to operate everywhere. People just don't think the EU should be meddling with national budgets, organising fiscal transfers or micromanaging sensitive national decisions on asylum policy. If the EU wants to become popular again, it must not go there and focus on its core mission: scrapping barriers to trade.
If Brexit happens and is the beginning of the end of the EU project, many of those responsible are to be found in Brussels.

First hit by regulation, then by protectionism. Is Europe going the way of its aluminium sector?

Published on Euractiv 

Over the years, the European Union has been closing a flurry of trade deals  with non-EU states, effectively reducing its external barriers to trade. Unfortunately, it looks as if those days may be coming to an end, with the forces of protectionism gaining ground both at the national and the EU level. While the EU has always had a wasteful and protectionist agricultural policy, a really protectionist, French-style industrial policy never managed to get off the ground. However, that may soon be changing, as both policymakers and industry groups are marching in lockstep to lock the doors of trade to the Continent.

Take the European Parliament, which is resisting awarding "market economy status" to China within the framework of the World Trade Organisation, in a bid to keep a number of possibilities to impose tariffs on Chinese products.  Opposition is also rife against TTIP, a trade deal being negotiated between the EU and the US. There even is firm opposition against the EU-Canada trade deal (CETA), which has already been signed, but the Walloon regional assembly is threatening to block it. 

A lot of the criticism against CETA and TTIP is focused on provisions that hand control over disputes arising from these trade deals to private arbitration courts. This system is already in place since the 1950s, indicating opponents are merely singling it out for criticism as they know they can’t win the argument when attacking the idea to remove barriers. A second point revolves around TTIP’s so-called “regulatory cooperation”, a process that has been painted as a threat to national sovereignty, but the truth is that the US Congress or EU policymakers would obviously never accept far reaching constraints on each other’s legislative capacity, so "regulatory cooperation" will never be much more than a marginal issue.

A good example of how the kneejerk protectionist sentiment is haunting Europe are the EU’s aluminium sector federation’s calls for higher import tariffs on aluminium.

The story begins after the sector had to cope with rigid national and EU labour market rules. On top of that, it also had to endure the EU's grand schemes for energy policy, with overzealous targets for renewable energy and a very troublesome CO2 emissions trading system - both of which ended up increasing energy costs. As a result of all this, between 2000 and 2013, primary aluminium production in the EU has fallen by 32 per cent. Today, only 30% of the primary aluminium needed to serve demand in Europe is actually produced in the EU.

Already existing EU tariffs on primary aluminium imports only made the downturn worse. Originally introduced in the 1970s as a protectionist attempt to shield European Union aluminium investments from the global market, Brussels’ tariffs system has remained strikingly stagnant despite the great deal of industrial change that has taken place across the continent. Today, EU tariffs, which stand at 4% and 6% for primary unwrought alloyed aluminium and 3% for primary unwrought unalloyed aluminium, not only fail to support EU industry but actively harm the Single Market’s predominantly downstream aluminium industry. SMEs are the most exposed, facing higher production costs as a result of these EU import tariffs. According to a study by the LUISS University in Rome, the cost to SMEs was estimated at €15.5 billion.

The story doesn’t end there. As a result of China's economic correction, a healthy phenomenon after years of overproduction brought about by Beijing’s gigantic monetary stimulus, economies worldwide are feeling the pain. In trying to dampen the effects of its industrial overcapacity, China has been flooding world markets with all its produce, including aluminium products, while paying little heed to actual demand.

As a result, large European aluminium producers have pounced on the occasion and are calling for even higher tariffs, despite the obvious harmful effect that the current level has on SMEs, their main customers. It is a surreal turn of events, with producers essentially lobbying to kill off their own industry.

Protection by raising tariffs for an industry that has lost competiveness after years of labour market and energy market regulation can never be the answer. A frequently raised argument is that China is subsidizing its producers and distorting competition. Indeed, in a 2015 interview, Gerd Gotz, the director general of European Aluminium made exactly this point, while demanding for more protection from the EU. However, if applied consistently, it would mean that the EU would have to engage in a race to the bottom for ever more protectionism with the trade policies of its most extremely protectionist competitor. Instead, the EU and its member states should obviously get rid of rigid labour market  rules and troubling energy policies causing European industry to lose competitiveness.

Policy makers in Europe have already saddled the population with excessive debt, excessive regulations and excessive taxes. Instinctive rejection of the outside world by scuttling TTIP, CETA or by denying China its MES would just mean harkening back to the continent’s worst impulses. Adding full-blown protectionism to this toxic mix may be one step too far for Europe’s economic health.

Thursday, June 16, 2016

Wat als de Europese Unie naar het ongenoegen had geluisterd?

Met het opkomende Brits referendum in gedachten is het nuttig om eens te zien hoe het zo ver kwam. Eén zaak is alvast duidelijk. Als de Britten effectief voor “Brexit” kiezen, oogst de Unie wat ze gezaaid heeft.

In 1992 stemde Denemarken tegen het Verdrag van Maastricht, dat het kader voor de euro voorzag. Ook stemden toen slechts 51,1% van de Fransen voor. Wat als de Europese leiders toen hadden geluisterd naar het ongenoegen dat leefde bij de bevolking en niet waren doorgegaan met dat Verdrag, in plaats van de Denen te vragen om opnieuw te stemmen?

De euro liet landen toe om goedkoper te lenen dan ooit mogelijk zou zijn geweest zonder toegang tot het goedkope geldkanaal van de ECB, maar dat was geen goede zaak. Het zorgde ervoor dat landen noodzakelijke hervormingen uitstelden. In België, Griekenland en Italië groeide het ambtenarenapparaat nog meer uit proportie dan voordien. Het goedkope geld leidde in Ierland en Spanje tot gigantische vastgoedluchtbellen en een zeer hoge private schuldgraad, wat beide landen noodzaakte Europese steun aan te vragen. Er kwamen transfers tussen landen en transfers tussen belastingbetalers en banken, zoals bijvoorbeeld in het geval van Griekenland, waar grootbanken enkel schuldverlichting voor Griekenland toestonden op voorwaarde dat de Europese belastingbetaler opdraaide voor de rest van hun blootstelling aan het land. De voorwaarden verbonden aan de euro-noodleningen leidden tot heel wat protest in de landen die ze moesten vervullen. Tegelijk kwam er kritiek van de  “netto-betalers”, terwijl ook de ECB’s lage rentebeleid, deels gericht op het ondersteunen van zwakkere eurolanden, spaarders, verzekeraars en pensioenfondsen alarmeerde.

De Italiaanse economie is per hoofd van de bevolking nu kleiner dan voor het land tot de Eurozone toetrad. De “bankenunie”, een gemeenschappelijke set toezichthoudende regels voor de eurozone, zou wel eens tot eurozone – protectionisme kunnen leiden, in die zin dat banken van buiten de eurozone op een dag niet langer actief zouden kunnen zijn binnen de eurozone als ze ook de bankenunie – regels niet respecteren. Dat is althans de vrees van de Britse regering, die in februari een procedure overeenkwam die dit mogelijk opbreken van het vrij verkeer van kapitaal moet verhinderen, vooraleer ook het vrij verkeer van goederen, diensten en personen er aan moet geloven. In vele euro-landen worden nu partijen populair op basis van de woede over de economische problemen die deels het gevolg zijn van de excessieve schulden die de gemeenschappelijke munt mogelijk maakte. Sommigen, zoals het Front National in Frankrijk of de partij van Geert Wilders in Nederland, vragen echter niet enkel een uitstap uit de eurozone. Ze willen ook van de EU af. Samengevat: de gemeenschappelijke munt vormt een bedreiging voor de Europese Unie.

Was de euro nodig om handel te drijven? Helemaal niet. Het Verenigd Koninkrijk, Polen en Zweden drijven handel zonder lid te zijn van de eurozone. Was de euro nodig om tijdens een crisis een agenda uit te voeren van machtscentralisering en transfers? Jazeker.

Er waren de referendums over het “Verdrag van Nice”, waartegen Ierland stemde in 2001. Er was de “Europese Grondwet”, die werd afgekeurd door de Nederlanders en de Fransen in 2005 en het “Verdrag van Lissabon”, dat opnieuw door de Ieren werd afgekeurd in 2008. Telkens opnieuw werden de kiezers gevraagd om een tweede keer naar de stembus te trekken om over de bewuste Verdragen te stemmen. De inhoud van al die Verdragen kwam uiteindelijk steeds op hetzelfde neer: meer macht naar het Europese beleidsniveau overhevelen, ofwel via het schrappen van nationale veto’s, ofwel via het creëren van nutteloze EU-ambtenarijen, zoals het “Europees Ministerie van Buitenlandse Zaken” of “Europees Raadsvoorzitterschap”.

De Europese Unie verloor verleden jaar twee referenda. In december stemde Denemarken tegen de Europese vraag om meer bevoegdheden op te geven op vlak van politionele EU-samenwerking als het land binnen Europol wilde blijven. Na de nee-stem verklaarde de Europese Commissie dat flexibiliteit op dit vlak “onmogelijk” was.

In juli stemden de Grieken dan weer tegen de voorgestelde Europese voorwaarden verbonden aan hun derde “steunpakket”, wat effectief dus een stem voor “Grexit” was. Dat steunpakket kwam er na het Griekse referendum toch in praktisch ongewijzigde vorm, wat jammer is want zo’n “Grexit” was mogelijk gezien het feit dat het Griekse bankensysteem toch gesloten was en er broodnodig een alternatief nodig is voor het beleid van steeds meer transfers en inmenging in nationaal begrotingsbeleid. Die zaken geven aanleiding tot heel wat ongenoegen over de Europese Unie.

Verleden jaar was er bovendien ook de beslissing om Centraal-en Oost-Europese lidstaten in de minderheid te stemmen op vlak van het zogenaamde verplicht “spreidingsplan” van vluchtelingen, wat in de praktijk sowieso niet mogelijk is binnen de paspoortvrije Schengenzone, maar niettemin moest worden doorgedrukt op last van de Duitse Kanselier Angela Merkel. Dat de EU de vluchtelingencrisis probeerde te misbruiken door nog meer macht naar zich toe te trekken zorgde voor veel bijkomend eurosceptisme in de nieuwe EU-lidstaten.

Dit jaar waren we er getuige van hoe de Britse Premier Cameron’s bescheiden voorstellen om de kloof tussen de EU en de burger te dichten volop werden tegengewerkt door de Europese instellingen, en ook wel door sommige Belgische beleidsmakers, zoals Premier Charles Michel of Minister van Buitenlandse Zaken Didier Reynders. Zo was er Cameron’s voorstel om groepen nationale parlementen een veto te geven over voorstellen van de Europese Commissie. In de praktijk zou dit enkel Europese wetgeving tegenhouden waarbij er echt excessieve Europese inmenging is, maar toch werd het vakkundig verwaterd. De grote “eurofielen” lijken maar niet te begrijpen dat wie elke hervorming van de EU tegenwerkt uiteindelijk diezelfde EU bedreigt. De reden waarom de zo belangrijke open grenzen van de Schengen-overeenkomst de asielcrisis in 2015 overleefden, is omdat de EU hier wel een zekere flexibiliteit toestond.   

Is het nu echt zo moeilijk om te luisteren naar het wantrouwen van de bevolking? Een recente peiling door Pew maakte duidelijk dat een meerderheid in een tiental EU – lidstaten bevoegdheden terug van de EU naar de lidstaten wil overhevelen. Weinig Europeanen maken zich druk om het feit dat de Europese ambtenaren lidstaten dwingen om Ryanair of Wizz Air te laten opereren. Er is echter heel wat meer twijfel over de vraag of het wel gezond is dat de EU zich inmengt in nationaal begrotingsbeleid, transfers organiseert of gevoelige beslissingen over asielbeleid wil opleggen. Als de Europese Unie opnieuw populair wil worden, moet ze zich beperkten tot haar kerntaak: het schrappen van handelsbelemmeringen. Uiteraard is het zo dat Groot-Brittannië vaak geen slachtoffer is van de Europese zucht naar steeds meer macht en geld, gezien het feit dat het land zich buiten de eurozone bevindt, maar wie wil lid blijven van zo’n club? Eén ding is zeker: Als “Brexit” het begin van het einde van het Europese Unie - project zou inluiden, dan zijn veel van de verantwoordelijken te vinden in Brussel.

Thursday, June 09, 2016

The risks of low and negative interest rates in the Eurozone

From around 4% in 2008, the ECB has been lowering its benchmark interest rate to a record low 0.0% today. In June 2014, it cut the interest rate on its deposit facility to -10 basis points (bps), a big change from 2008 when the rate was 325 bps. Most recently, the central bank cut its deposit rate further into negative territory to a fresh new low of -40 basis points with effect from March 16, 2016.
It should be stressed that this short term rate setting by the ECB is only one of the factors leading to long term rates going steadily lower in recent years, apart from increased international saving and the expansionist monetary policies of other leading central banks. A contrarian could perhaps even describe low rates as a sign of economic health, pointing out how in the fifteenth century in Europe, interest rates fell from 14 per cent to 5 per cent. They even hit 3 per cent in the Netherlands in the sixteenth century, then at the lowest level in Europe. The jury is still out to what extent today’s low rate environment is “artificial”, as a result of central bank activism, or “natural”, as a result of increased saving due to increased wealth. 

In any case, ECB President Mario Draghi has always defended this "accommodative” monetary policy” as a means to “support prospects of an economic recovery”, as he said for example back in 2013. Whether this target has been reached is a matter for debate, which isn’t so easy to settle, given that we can’t be sure what would have happened otherwise. What is certain, however, is that low interest rates do have material consequences. Hereunder we’ll provide an overview of these: 

1)      A debate erupts about possible losses for savers, insurance firms and pension funds

Especially in the North of the Eurozone, there has been a lot of discontent over the relentless decrease in return savers enjoy from their deposit accounts. Several German institutes have come up with estimates of the cost. According to DZ Bank, after six years of low rates, the average German citizen would have lost out on €2,450 by the end of 2016. Germany’s prominent IFO institute also took into account the damage low interest rates have wrecked upon life insurances and voluntary private pensions, claiming that combined with the losses for deposit accounts, the cost for Germany alone would amount to €327bn euro since 2008.

These calculations may overlook that one can’t just assume that interest rates would have stayed at a higher level, given the disruption of the financial crisis in 2008. Some would even contend that one can’t assume the mere survival of many banks in the absence of extraordinary central bank measures, which include lowering short term interest rates.

In the Netherlands, where pension funds manage not less than 1 trillion euro, they were forced to cut payouts already and may need to do so again. This led to the pension industry sounding the alarm, calling the situation “dramatic”. The Dutch Central Bank President was even convoked to Parliament for an explanation. Those trying to counter the criticism have argued  that the payout cuts were due to the Dutch regulations requiring pension funds to have a cushion. Disagreements persist whether these regulations are too stringent and even if so, whether they should be lowered just to alleviate the effects of lower interest rates.

Also Germany’s very large insurance industry, which was forced to reduce benefits for clients, has complained. This, along with the criticism of German savings banks, contributed to sharp political attacks from senior German policy makers. Bavaria’s Finance Minister Markus Soeder dubbed the ECB’s interest rate policies “gradual expropriation” of savers and insurers. Also German Finance Minister Schäuble and deputy Chancellor Sigmar Gabriel, a social democrat, have blamed the ECB.
Mario Draghi has responded the ECB isn’t really responsible for low rates, claiming these really are a consequence of a “global excess of savings” and are “a symptom of low growth and low inflation”.
This indeed goes to the heart of the debate: to what extent is the ECB, which can only set short term rates, also responsible for long term rates? It must be said the ECB sends out contradicting signals here, as it boasted in one of its recent publications that its “credit easing” had “significantly lowered yields in a broad set of financial market segments”. Low and negative rates are also seen as part of the ECB’s perceived overall dovish monetary policy, along with QE, which helped to expand the ECB’s balance sheet, making it even less credible for the ECB to claim it can’t really be blamed for any of it all. 

Even if one would be able to prove the ECB and other central banks have been key in driving interest rates down, one could argue – as they would – that these so-called “stabilisation benefits” may have helped avert more damage to savers, pension funds and insurers. To which the opponents then would retort that a long overdue correction, which would also avoid moral hazard, may have been beneficial for the health of the system on the long term. 

One last important element in this discussion is that since 2011, the real interest rate on German savings, distinct from the nominal interest rate, has actually been rising. This is due to falling consumer prices, which partially are the result of international factors, such as China’s deleveraging. So when ordinary savers see their interest income disappearing, they should actually be happy to have more purchasing power thanks to statistics showing falling prices. In theory, these stats also take into account Germany’s increasing real estate prices. 

Obviously, one could argue that their purchasing power would have increased even more in the absence of low nominal interest rates. Then again the deflationary pressure may have also hit their salaries, at least in the short term, but from an Austrian economics viewpoint, it’s a necessary – and painful – adjustment needed to kick-start growth again. This all indicates that in a globalized economy, debates about purchasing power and inflation aren’t easy to settle. 

2)      In the Eurozone, people save less for a rainy day

Another effect of the ECB’s low rates seems to be that people save less for a rainy day. That’s true at least for people in the Eurozone, as the global savings rate is up since 2009. Eurozone households saved 7.77% of disposable income in 2008, which is now down to 5.71%. Net saving per inhabitant in the Eurozone has even decreased by a whopping 50% during the last few years, from €2,400 at the end of 2007 to only €1,200 in 2013.[1][1]
Obviously correlation may not be causation and other factors, such as higher unemployment, also play a role here, while a detailed country-by-country look reveals sharp differences. A big drop in the percentage of households saving their disposable incomes can be witnessed in Austria, Belgium, Italy, Greece, Slovenia and Ireland, while not much has changed in Germany, France and Finland. In Estonia, the Netherlands and Slovakia. 

In any case, an economic crisis affects this: it can drive the savings rate even lower, or sometimes even up: the Dutch real estate market went through a severe crisis, as up to one in three house owners were in negative equity, and still the savings rate increased. In Greece, which suffered its well-documented crisis, a modestly negative savings quote of -3.84% in 2008, then broadly similar to the one in the Netherlands, turned into a massively negative 17.28% in 2014. 

Household Savings – Total, % of Household Disposable Income[2][2] 


Also government finances in the Eurozone may be affected by the savings rate on the long term. Higher levels of household savings are considered to allow a larger portion of a country’s overall debt to be financed internally, which is seen as more sustainable and explains why for example Japan has been able to rock up its debt to a whopping 229% of GDP. 

More fundamentally, long-term economic growth requires capital investment into infrastructure, education and technology, as well as in factories, business expansion. A typical domestic source for this are household savings.  

3)      Struggling governments and shaky banks benefit

It’s quite well-documented that shaky governments and banks in the Eurozone are kept afloat due to the extraordinary low or even negative interest rates. When the ECB started its LTRO –programmein 2011, thereby issuing loans with cheap interest rates to banks, French President Sarkozy openly boasted the real purpose was to fund governments, when he said: “This means that each state can turn to its banks, which will have liquidity at their disposal.” 

It should be noted that LTRO may have supported the eurozone’s periphery even more than the general low interest rate policy. This because a large portion of the financing provided to eurozone banks through the LTRO was used to buy periphery sovereign debt, with eurozone periphery banks in Ireland, Italy, Spain and Greece taking the majority of the first 36-month issue in late 2011.
Long term long interest rates, which, as opposed to LTRO, may only be to a certain extent the consequence of the ECB or even other leading central banks, did help governments in an indirect way. They propped up shaky banks and their “bad debt”, so governments wouldn’t have to bail them out. It was estimated by Spain’s IE Business School that in 2011, more than 90% of mortgages in Spain were tied to short-term interest rates and an 0.75 percentage point rate increase would have added almost €1,000, or around $1,430, per year to the average Spaniard's mortgage payment. Modest ECB interest rate hikes in 2011 may have been one of the triggers pushing the Spanish government to request a €100bn bailout for its banks in 2012 after all. Whether this was the reason or not: the ECB hasn’t dared to increase rates ever since. 

As Bundesbank chief Jens Weidmann pointed out, the positive consequences low interest can constitute for banks mainly exist on the short term, when he explained: "In the short term, banks tend to profit from lower rates, as liabilities have shorter maturities than their assets, meaning refinancing costs will fall before interest rates do (...) But the longer the period of low interest rates continues, the more this eats into interest rate earnings." 

The more recent phenomenon of negative interest rates is somehow puzzling. Why would financial institutions be happy to pay for the privilege of lending to highly indebted governments? One factor explained this are the Basel accounting rules, which declare sovereign debt “risk-free”, something which the “European Systemic Risk Board”, chaired by Mario Draghi, wants to be changed. 

4)      Certain owners of certain assets classes profit from low rates, amid claims there are investment bubbles 

Whether “ordinary” businesses and citizens profit from cheaper borrowing, which may compensate for the damage to savings, isn’t very clear. And even if they would, and for example enjoy higher house prices, some  have claimed a bubble may be around the corner. 

As inflation has fallen faster than the ECB has cut nominal rates, overall real interest rates have actually risen substantially in the Eurozone over the past four years. Still, in specific segments, borrowing costs seem to be down: 

The cost of eurozone corporate borrowing has steadily fallen over recent years, as a growing pool of corporate bonds emerges with negative yields. This isn’t only due to low rates but also due to ECB bond buying, which drove down yields on sovereign debt, on its turn pushing many investors into the corporate bond market. The eurozone’s periphery certainly also enjoys cheaper borrowing rates. For “non-financial counterparties”, loans of up to 1 million euro with a maturity of 1 to 5 years have even become cheaper in Spain than in Germany. 

Mortgage borrowing rates differ a lot across the Eurozone. Despite the fact that both in Ireland and Spain, banks are still coping with the aftermath of epic real estate bubbles, partially caused by membership of the common currency and its easy money, mortgage loans are nowhere more expensive than in Ireland and they are among the cheapest in Spain. On the sidelines, there have been incidents of negative mortgage rates for consumer borrowing in Denmark, Belgium and the Netherlands. 

Will this create a new real estate bubble? At least for Spain, a high correlation can be witnessed between lower interest rates and the increase in the level of credit destined to the housing sector.  Also in Germany, however, prominent economist Hans-Werner Sinn has claimed there is a “real estate bubble”, arguing that average urban property prices having risen by more than one-third since 2010 – and by nearly half in large cities. Others have countered that the German real estate market was facing a long overdue upward correction anyway.

Increasingly low rates don’t favour investors into real estate in an equal manner. They particularly help homeowners who already own a house and have negotiated a floating interest rate. They work to the disadvantage of first time buyers or renters, who see prices rise.

Low interest rates also seem to correlate with an increase in the value of European stocks, at least until the middle of last year, when a world-wide correction started. In certain Southern European countries, as for example Italy, this happened despite very low growth and persisting high unemployment, indicating the “bubble zone” may have been reached, but no hard proof of this is possible.

Even if increasing stock or house prices may benefit a number of citizens, they don’t so in a consistent way. Only a small fraction of households in the eurozone – between 5% and 12% – own bonds, publicly traded shares or mutual funds, according to the ECB.

It won’t come as a surprise that it’s mainly the rich who invest in stocks: according to the ECB, among households in the lowest quintile of the income distribution, only 2.2% own publicly traded shares, in contrast to 24.4% in the top quintile. Certainly ECB President Mario Draghi wouldn’t be surprised, given how he admitted last year that the ECB’s aggressive monetary easing may contribute to inequality, mentioning how “the distribution of wealth” may be affected.

That manipulating interest rates carries along the risk of creating investment bubbles, is the main reason why savers should be wary to take Mr. Draghi’s advice that they “shouldn’t just invest their money in savings accounts, given that there are other possibilities”. Perhaps precisely because of the fact that Draghi’s “other possibilities” carry more risk, it’s mainly those with more resources who have been exploiting them.


The debate on the effects of low long term interest rates is fraught with controversy about whether and to what extent central banks even have the power to affect long term interest rates, whether they should try to manipulate them and what the consequences are. The overview above makes clear that the effects are in any case material and that the ECB has some role in all of it, but it’s hard to determine how big. 

[2][2] Source: OECD (2016), Household savings forecast (indicator). doi: 10.1787/6ab4e1bd-en (Accessed on 14 April 2016)