Easy Money

German Critics of the ECB Overlook Greater Risks to Europe's Economy

Reducing unemployment in Spain is good for Germany, too.
  • Why it matters

    Why it matters

    The ECB has come under fire for its low interest rates and generous bank lending in Germany, the euro zone’s largest economy.

  • Facts


    • Germany’s economy shrank 0.2 percent from the first to second quarter in 2014.
    • Low interest rates have saved the German government €120 billion since 2007, according to the Bundesbank.
    • The country’s rate of inflation has dipped to 0.8 percent.
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German disapproval of the European Central Bank’s monetary policy has grown steadily in recent years. Critics say the policy only takes into consideration the interests of crisis-hit countries in the euro zone. They argue it hurts Germany because it redistributes risks and is too expansive for Europe’s best-performing economy.

The criticism exploits the old anti-European resentment: “What’s good for Europe must be bad for Germany.” But the latest numbers on the German economy should force critics to reconsider – because an expansive monetary policy is definitely in Germany’s best interest.

Many of the unconventional measures by the central bank are designed to relieve the ongoing credit crunch in southern Europe. But by helping Greece, Italy and Portugal, for instance, they indirectly boost Germany’s growth by increasing demand and promoting stability.

But Germany also profits directly from the ECB’s monetary policy. The measures reduce the likelihood of a weaker German economy – which contracted 0.2 percent from the first to second quarter – and the very real danger of deflation. It’s wrong to argue for a monetary policy that would set higher interest rates. At 0.8 percent, the rate of inflation in Germany is much too low, and will certainly remain so for the mid-term. Overall, the German economy is still growing, but it could grow faster under the right conditions – including low interest rates.

It’s true that the European Central Bank’s monetary policy carries considerable risks and not all of its measures have succeeded. It is legitimate to worry about higher costs for German savers. But these are not a consequence of monetary policy. They come from a deeper economic crisis in Europe that is being combatted by this very same strategy.

It’s also true that the generous loans to European banks can lead to bubbles in asset prices and misallocations. Central bankers must take this risk far more seriously than they have in the past. At the same time, however, not every rise in asset price is negative. Real estate prices are rising because many German savers are buying their own homes. In principle, this is a good thing because it increases homeowners’ wealth.

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