Last week the ECB’s governing council agreed on interest rate cuts and some fresh liquidity measures. The policy move has sparked off quite some excitement in all kinds of corners. Certainly financial markets highly welcomed the ECB’s much-awaited new easing initiative, with stock indices surging and bond yields plunging to record levels. International commentators generally felt that the ECB was – finally, if belatedly – doing the right kind of thing. And, generally speaking, the European political body seems to be sufficiently famished, and perhaps also a little terrified by the recent EU parliament election results, to welcome any perceived easing of pain. Only one party felt seriously short-changed by the euro’s independent guardian of stability: German savers.
In Germany, the ECB’s latest policy decisions, featuring a negative interest rate to be paid by banks to the ECB for lending to the ECB by means of its deposit facility, triggered an across-the-board outcry orchestrated by the German media, ranging from heavyweight tabloid Bild to the mouthpiece of Germany’s conservative intelligentsia Frankfurter Allgemeine Zeitung. German savers appear to be up in arms against the ECB’s outrageous decision to shave 10 basis points off its key policy rate and introducing a negative rate on its deposit facility. The president of Germany’s savings bank association declared that the ECB’s move amounted to expropriating German savers. And former ECB executive board member Jürgen Stark, who had resigned back in 2012 for “personal reasons,” which seemed to be all too clearly related to the ECB’s government bond buying program, was glad to add fuel to the flames by declaring in an interview that the ECB was breaching its mandate.
The German media reaction to the ECB rate cut is more than a bleak statement about the quality of economic journalism in Germany. One probably has to concede that it also well reflects the general state of mind and German psyche about Europe’s common currency project and the havoc it has wreaked across the continent. There are some important lessons here for Germany’s euro partners – and beyond.
First of all, these events once again highlight that in the German euro debate superficial morals prevail over any economic expertise. In Germany, saving is by its nature always virtuous. Savers, as creditors, occupy the moral high ground. Creditors are simply morally superior to debtors. In fact, debtors are suspected to be afflicted by some moral defect. As savers apparently have a moral right to get paid interest, the ECB’s move is seen as expropriation; its decision to make the creditor pay what seems like a “Strafzins” (penalty interest rate) for lending to the debtor seems outright immoral.
Within these pseudo-moralistic dimensions inspiring the German euro debate economic reasoning is conspicuous for its absence. It is somehow lost that there can be no creditor without any debtor. It is also lost that Germany as a nation can only run a current account surplus if other nations run deficits and pile up debts. So it has never entered the German national debate that Germany only managed to balance its public budget thanks to other countries’ willingness to borrow and spend on German exports. Instead, morally, it seems a clear-cut case that Germany has done everything right. If there is trouble in the system, it must be because of others’ failures and moral deficiencies.
Accordingly, if the situation of struggling debtors has negative repercussions on the creditor’s situation, this is quite intolerable since morally wrong; while providing help is especially hard as suffering pain is seen as a natural part of the sinners’ moral healing process. In other words, in Germany, morals quite easily get in the way of solutions that would be – economically – in Germany’s own national interest. I hasten to add though that morals do not so easily stand in the way of German export interests, including military sales to questionable international buyers.
At any rate, it follows that it is literally impossible for the German mind to appreciate that Germany itself may actually be part of the euro problem. Just as it is literally impossible for the German mind to comprehend that exporting the German export-based economic model is bound to create problems. In the German mind, the ECB cut its rates and imposed a “Strafzins” in order to rescue those reckless southern sinners, hurting German savers as innocent bystanders. If only everyone were to follow the German model of moral rectitude and competitiveness, things would be just fine for everyone.
That, of course, is exactly what Germany’s euro partners are currently trying to do, to save more and become more competitive. Predictably, the collective endeavor to turn the euro area into a greater Germany has caused vast and unnecessary impoverishment, pushing the euro area to the brink of deflation, which, in turn, and even as “lowflation,” is greatly aggravating the challenges of over-indebtedness. It is very clear that this whole exercise can only work if becoming as competitive as Germany means building up a large external surplus vis-à-vis the rest of the world, even larger than is already currently the case. In this context, it is getting ever harder to interpret the ECB’s words and deeds as anything but attempts to weaken the euro in order to facilitate these mercantilist ambitions.
Do not miss the great irony in all this. When Europe embarked on the common currency project the greatest hurdle was appeasing German hyperinflation fears. German monetary legend has it that German savers were expropriated twice by hyperinflation in the first half of the last century, first in the Weimar hyperinflation of 1922-23, and then allegedly by a second one in the 1940s. Oddly, the deflationary experience of the Great Depression has been eradicated from the German collective memory, and apparently the worst thing to remember about Adolf Hitler is that he expropriated the German saver once again.
Twice burned in the hyperinflation oven, the German saver was thus truly in need of special protection, and the Bundesbank was happy to assume the role of sacred hyperinflation bulwark. As Jacques Delors once observed, while some Germans may love god, all Germans love the Bundesbank. So the ECB had to be as independent and stability-oriented as the Bundesbank – to guarantee a euro that was to be as sound and strong as the Deutschmark. In due course the ECB became known for single-mindedly focusing on fighting inflation risks perceived by the bank, even if by no one else. The bank’s interest rate hikes of April and July 2011 only underscored this ill-guided obsession. And yet, the end of the story is that German savers get expropriated not by another much-feared hyperinflation, but by not-at-all-feared deflation.
Or is this not the end of the story? Mrs Merkel may have declared the euro crisis over. In truth, it remains an open question whether the euro area will really resolve the euro crisis and turn itself into a community of joint prosperity rather than impoverishment, featuring a semi-prosperous German core surrounded by over-indebted vassal states. The reaction in Germany to the ECB’s latest move is disheartening. Instead of engaging in a process of honest self-reflection, Germany continues to portray itself as the euro victim. First German workers bravely mustered years of belt-tightening to restore Germany’s competitiveness. Then German tax payers had to bail out those euro sinners who had lost their competitiveness in that very process. Finally German savers get expropriated by the ECB as so much all-round belt-tightening turns out to be a serious health threat. Forget the real hardship in the euro periphery, Germany is the eternal euro loser.
It will take a courageous German politician to explain to the German electorate that their world view is vastly out of touch with reality. Unfortunately that politician is nowhere in sight. Instead, the above German myths are providing a fertile ground for anti-euro/anti-Europe lunatics. Despite Mr Draghi’s “whatever it takes” promise, there is only so much the ECB can do about it. Europe is running out of time.
(Cross-posted at Social Europe)