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People here in Germany wonder how the countries that have not budgeted well and have for decades failed to reform can be rewarded with loans and low interest rates. And are thus getting the countries that have worked hard and made sacrifices to pay for it?
It’s not true. So far, thanks also to the strict monitoring by the governments of these hard-working countries, they have not paid much if anything. But also the European institutions played a role. The ECB has thus far not made any losses and each year, it distributes billions in profits to its members and among them to the Bundesbank, which passes these profits on to the Ministry of Finance, and so to the people of Germany. What is more, they benefit from the fact that public and private credit are unusually cheap. And consider also the TARGET 2 balances ...
... i.e. the claims and liabilities that the national central banks in the euro area have vis-à-vis the European Central Bank and which indicate the extent to which lending via the ECB is being taken up ...
... and which some people claim is money for which Germans would be liable in the event of losses. People who make much of this argument forget to say that these TARGET 2 balances have fallen by half since July 2012. What does this mean? It means that less is being borrowed from the central bank, it means that confidence is growing in the system. Private money is coming into circulation again, and it is being invested in other countries. The lesson is clear. Anything that strengthens confidence in the euro is also beneficial for the German tax payer.
But the most pain is caused by the low interest rates, which you said in Handelsblatt two weeks ago will stay low.
One must make a distinction here: there are interest rates that we set with our monetary policy, and there are interest rates on long-term securities set by the markets. The latter are more directly relevant for savers. The fact that our key policy rates are low and expected to stay low for quite some time surely has an impact on long-term interest rates. But there are two more fundamental reasons why those rates are low: first, because the whole world and above all the euro area is bringing its money to Germany and investing it in these securities so interest rates fall. Germany acts as a safe haven in times of crisis. As confidence returns, this should be less the case. And second, because expected inflation and the long-term growth forecast for the economy are both unfortunately very low. As our policy brings back inflation to close to 2% and growth picks up, more normal levels of interest rates will return.
This explanation lets the ECB off the hook.
Let me be clear: central bank policy is not about punishing German savers, and it is not about rewarding weak countries. The European Central Bank’s mandate is to achieve an inflation rate of just below 2% for the euro area as a whole. To fulfil that at this time, it must keep interest rates low and must work towards an expansionary monetary policy which accompanies growth. That’s the point, not punishment or rewards. But sometimes it is hard to explain this to everyone in Germany, including in discussions with some politicians...
What are they saying to you?
They say: in that way you are removing their incentive to push through reforms.
And isn’t that true? Italy and France are two examples.
Our job is not and cannot consist of taking on the reform tasks of individual governments – not least since we lack the democratic mandate to do so. Do you believe then that it would be better for German savers if we tried to raise interest rates?
If you put it that way, the answer is obvious.
The answer is no!
Why?
Because we would then create deflation and recession. Anybody can see that the current economic situation calls for an expansionary monetary policy. If monetary policy was restrictive, even more companies would go bankrupt. And then long-term interest rates – the interest rates that affect the savings of Germans and other Europeans – would fall further.
But when the interest rate is near to zero and you want inflation at 2%, then this will consume even more of the assets that Germans want to save for their old age.
But this reasoning is wrong! If inflation were to rise, we would have to raise rates again.
Why do we need inflation anyway, even if it is very low?
Yes, why? We’ve learnt this lesson from Japan. In Japan there wasn’t this 2% objective, and in the 1990s prices began to fall. The problem was not that prices were falling, but that people thought that they would never rise again, they would keep falling further and further. So they stopped buying things, because they thought they could get them even more cheaply at a later date. Production fell, so prices fell even further, and so the economy became slower and slower. We are not in that situation, yet.
That’s what we call deflation.
Yes, what I described is a negative deflationary spiral. The only thing that counters this is the credibility of our inflation objective -- the attainment of which requires the continuation of our expansionary monetary policy.
But you have already given us this expansionary monetary policy!
Our expansionary monetary policy has already contributed to a turnaround in the growth of loans to firms. But that is not enough. If firms don’t increase productivity, they will not be competitive.
That means that countries and firms must introduce reforms.
Right! Productivity must increase particularly in the so-called southern countries. There even before the crisis, many companies were no longer productive partly because they had not invested in new technology, partly because the countries as a whole were no longer competitive. For many years easy credit conditions allowed them to import from the rest of the euro area while increasing their debt, both public and private. The crisis made it clear that growth is sustainable only if it is not accompanied by unsustainable debt levels. When this condition is not satisfied brief periods of growth are followed by deep recessions, as the recent history of the U.S. and of some euro area countries shows. That is why our expansionary monetary policy must be accompanied by higher productivity. Those countries need to make structural reforms to make investment profitable. I have been saying this for years now: We are pulling our weight but the governments also have to do their bit.
Are you telling me that is where your sphere of influence stops?
Exactly, we can only provide access to funding, we can only remove one of the obstacles, and nothing else.