Narratives about the ECB’s monetary policy – reality or fiction?

New ECB Board member Isabel Schnabel questions the German criticism of ECB monetary policy. That she is German makes it even more interesting.

In recent years, Germany has experienced one of the longest economic upswings since the Second World War.[1] Since 2010 the German economy has grown at an average annual rate of 2%. Unemployment has fallen to its lowest level since German reunification.

The monetary policy of the ECB has contributed significantly to that expansion. By lowering interest rates and making use of new monetary policy instruments, the ECB has created financing conditions that support investment, growth and job creation across the euro area.

And it was the ECB’s decisive action in 2012 that prevented a break-up of the euro area.

Despite these considerable successes, the public debate about monetary policy has become more heated in parts of the euro area, and especially in Germany.

The conversation is dominated by various narratives, such as the “expropriation” of German savers through “punishment rates”, the “flood of money” that will inevitably lead to massive inflation, and the creation of “zombie firms” as a result of expansionary monetary policy.

In my remarks today, I would like to take a closer look at some of these narratives and discuss them in the light of the facts.

I will demonstrate that the ECB’s current monetary policy stance is necessary in order to achieve sustained price stability in the euro area, and that the use of unconventional monetary policy tools, such as negative interest rates and asset purchases, is largely a consequence of structural changes in the economy that lie beyond the ECB’s control.

I will also discuss the potential side effects of these monetary policy measures and show that many of the fears that are frequently being expressed are based on half-truths and false narratives. The excessive criticism of the ECB is dangerous because it not only jeopardises trust in our single monetary policy, but also undermines European cohesion.

In her interview, she explains:

You want to clear up misunderstandings about the ECB. Would you say that you are now on a type of peacekeeping mission to mediate between the central bank and the German public?

No, that is not what this is about. I am not a mediator between two parties; I am now a member of the ECB’s Executive Board. But in my new role as a board member I am committed to seeking greater public understanding and clearing up misunderstandings. For people to constantly hear that the ECB’s policy is harmful to them is misleading and it undermines their trust. This worries me. 

 Which misunderstanding do you wish to clear up specifically?

The expropriation of savers is the main misconception. Even the term itself is legally incorrect. It would imply that the ECB is taking something away from people that rightfully belongs to them. But that is not the case. 

But rather?

The real interest rate – that is, the interest rate adjusted for inflation – emerges from the economy’s growth potential in the long run. Sweeping macroeconomic trends – such as demographic ageing and weak productivity growth – have caused a worldwide decline in real interest rates. The ECB cannot change these fundamental developments but can only steer its key interest rates around the trend. If it wishes to fulfil its mandate and stimulate the economy at a time when inflation is too low, it has to lower interest rates even further. If the policy rate then approaches zero, it becomes increasingly difficult to attain its objective with conventional tools. We see this constellation all over the world.

You’re suggesting that the ECB is a victim rather than a perpetrator in respect of negative interest rates. Are there any robust economic studies that back this up?

There are countless studies that estimate the equilibrium interest rate, using various methods and delivering different outcomes. But the trend is clear, it is pointing downward. I understand the frustration about low returns on savings, but that is not the whole picture. Borrowers and property owners have benefited, as have the government and employees. Analyses have been conducted on what would have happened without the ECB’s loose monetary policy. They found that economic growth would have been considerably slower, inflation would have been lower and unemployment higher. The one-sided, negative presentation of the consequences of the ECB’s policies is misleading. All in all, Germany has benefited from the ECB’s monetary policy.

You are saying that savers are not being expropriated at all. But the ECB’s negative interest rate policy effectively means that we can forget about traditional forms of investment such as savings accounts or life insurance policies. At the same time, people are being advised to provide for their retirement. How are they supposed to do that? 

If the ECB were to increase interest rates in the current environment, it would be harmful for everyone – not least for savers. I can’t give people any investment tips. But there’s no doubt that, in today’s interest rate environment, it is not especially advisable to put all your funds in savings or time deposit accounts. Politicians also have a duty to inform citizens about the alternatives to interest rate products.

Hmm..

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