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Fahrenschon: Free Europe from monetary policy trap

Fahrenschon: Free Europe from monetary policy trap

German Savings Banks' leader says negative-interest-rate policy having disastrous effects on almost all parts of economy, society.

>> See the related press release from DSGV​

>> See ESBG postion on current ECB accomodative monetary policy

​BRUSSELS, 13 October 2016  ​The negative-interest-rate policy is having disastrous effects on almost all parts of the economy and society, according to Georg Fahrenschon, President of the German Savings Banks Association (DSGV) at a press conference held last week by the association on the sidelines of the annual meetings of the International Monetary Fund (IMF) and the World Bank in Washington D.C.

"Determined economic policy must free monetary policy from the trap", he noted. Fahrenschon further criticised the current “cheap money” policy, saying that it reduced the pressure on European economic and financial policymakers to take action and to implement the necessary structural reforms. The European credit and capital markets were no longer working adequately because decisions to waive liquidity and to take risks were no longer rewarded. Moreover, population groups with limited assets were particularly hard hit by interest losses because it was not easy for them to turn to capital markets instead. Only excessively indebted countries and investors able to invest in high risks stood to benefit from the glut of extremely cheap money.

Fahrenschon took the view that the redistribution effects associated with this policy were no longer politically acceptable because this raised fundamental socio-political concerns. “Due to the lack of interest income, many people will no longer be able to afford to retire at the time they had planned to retire.”

According to Fahrenschon, there was currently an imbalance between global savings on the one hand and global investment opportunities on the other, which made it difficult to exit the misguided monetary policy. However, it would be wrong to blame savers for this imbalance. Savers were acting reasonably when, in view of rapidly rising life expectancy, they increased their provisions for old age and compensated for the lack of interest income by stepping up their saving efforts.

The reluctance of European companies to make investments was in some cases caused by a lack of creditworthiness and in other cases by a lack of trust. Neither root cause could be remedied by means of more liquidity. For this reason, significantly increasing public investments in the industrialised nations was an important key to carefully rectifying the existing imbalances. Countries with very solid budgets like Germany should lead the way and invest more in public infrastructure, including education.

European Institutions; Liquidity risk