Leaders | The ECB

Going negative

Germany should stop whining about negative rates and start borrowing

GERMANY and the Netherlands are usually great supporters of central-bank independence. In the 1990s Germany blocked France’s push for a political say over monetary policy in the new European Central Bank (ECB). The Dutchman who first headed that bank, Wim Duisenberg, said that it might be normal for politicians to express views on monetary policy, but it would be abnormal for central bankers to listen to them.

That was then. Now German and Dutch politicians are trying to browbeat Mario Draghi, the ECB’s current president, into ending the bank’s policy of negative interest rates (see article). The German finance minister, Wolfgang Schäuble, accused Mr Draghi of causing “extraordinary problems” for his country’s financial sector; wilder yet, he also pinned on the ECB half of the blame for the rise of the populist Alternative for Germany (AfD) party.

Both countries’ politicians attack low rates as a conspiracy to punish northern European savers and let southern European borrowers off the hook. ECB autonomy was sacred when rates suited Germany; now that rates do not fit the bill, and are imposed by an Italian to boot, it is another matter. The critics are not just hypocritical. They are partly responsible—let’s say 50% to blame—for the mess.

As Mr Draghi has pointed out, his mandate is to raise the euro zone’s inflation rate back towards 2%. It is currently at zero, and periodically dips into negative territory. There is a legitimate debate to be had about how far a negative-interest-rate policy can go. The banks are unwilling to pass on negative rates to depositors, which means their own earnings are dented. And yes, savers are undoubtedly suffering at the moment. But raising rates would squash the recovery, and with it any chance of a normalisation of monetary policy.

The ECB’s policies of ultra-low rates and quantitative easing (printing money to buy bonds) are the same as those used by other central banks in the rich world since the onset of the financial crisis. Even the Bundesbank, whose allergy to inflation largely explains why the ECB was slower to embrace unconventional monetary policy than its peers, has felt compelled to defend Mr Draghi from attacks in Germany.

Fixed ideas, broken economy

The fundamental reason for Europe’s low interest rates and bond yields is the fragility of its economy. Its unemployment rate is stuck at 10%. While the ECB has been doing what it can to press down the accelerator, however, the austerity preached by the likes of the German and Dutch governments has slammed on the brakes. For years, Mr Draghi has been saying that monetary policy alone cannot speed up the economy, and that creditworthy governments must use fiscal policy as well, ideally by raising public investment. If Mr Schäuble wants higher yields for German savers, he should be spending more money. Instead, his government is running a budget surplus.

A hesitation to spend might be understandable if it were difficult for the German government to find good investment opportunities. But Germany has suffered from low infrastructure spending for decades. Investment by municipalities has fallen by about half since 1991, according to a 2015 report by the German Institute for Economic Research; since 2003 it has failed even to keep pace with the deterioration of infrastructure.

Should Mr Schäuble wish for a demonstration of how the money might be spent, he might take a car journey from his office in Berlin to that of his colleagues in The Hague. He would come to a halt halfway there, in Bad Oeynhausen, where the Autobahn peters out into a jammed four-lane city road. (As an EU report delicately put it last year, “The motorway is missing.”) A train would be just as slow: Germany’s high-speed trains can travel at their top speed of 300kph (190mph) on only a fraction of their routes.

The German and Dutch governments can currently issue ten-year bonds at yields of 0.3% and 0.5%. They should be taking advantage of cheap money to spend more on problems like these. That would stimulate short-term economic activity and facilitate long-term growth. There is no better way to help meet the desire of their ageing citizens for higher returns on their savings. If politicians want a scapegoat for the low rates that bedevil their savers, they would do better to look in the mirror than target the ECB.

This article appeared in the Leaders section of the print edition under the headline "Going negative"

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