Savers' Revolt

In Germany, Zero Interest in Mario Draghi

mario draghi title bild source dpa march 10 2016
ECB President Mario Draghi is unpopular among many in Germany, where savers can no longer earn money from their favorite investments -- simple interest-bearing accounts.
  • Why it matters

    Why it matters

    The loose monetary policies and low-interest rates introduced by European Central Bank President Mario Draghi are increasingly unpopular among German savers used to interest-bearing ways of accumulating wealth.

  • Facts


    • The ECB’s loose monetary policies are intended to raise inflation in the euro zone toward an ECB target of just under 2 percent.
    • One fund company estimates that German private households will lose €224 billion in interest over the next five years.
    • Banks complain the ECB’s strategy is counterproductive, raising their costs. The ECB says banks are avoiding needed reforms and blaming the ECB.
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This week in Frankfurt, the scene repeated itself again. An emotionless Mario Draghi, the president of the European Central Bank, uttered nearly the same words residents of the 19-nation euro zone have been hearing for years.

Interest rates in the euro zone would remain “at their current levels or even at lower levels” for the foreseeable future. Under Mr. Draghi’s leadership, on Thursday, the bank once again lowered its base rate to zero, from 0.05 percent.

It’s taken almost eight years, but the bill for the world’s 2008 global financial crisis is finally coming due to taxpayers in the euro zone and especially in risk-averse Germany. The ECB’s cheap-money rescue has kept alive the euro, but the cure has been toxic for a nation of savers trapped in zero-interest hell.

Money has never been so cheap in the euro zone, and the ECB is even charging banks negative interest – the penalty was raised to -0.4 percent Thursday from -0.3 percent – to park their money overnight at the central bank in Frankfurt.

The ECB also doubled down again this week on its massive “quantitative easing” purchases of euro-zone debt, another drastic measure to keep the euro patient from flat-lining. This week, the ECB upped its monthly purchases of euro-zone debt to €80 billion ($86 billion) from €60 billion, and expanded its buying activities to include corporate bonds.

Yet aside from Germany, Europe’s largest economy and the economic motor of the currency zone, many economies in the zone are barely growing. Banks might be taking advantage of low ECB rates to cut their own borrowing costs, thank you very much, but they’re not lending out the rest.

Where the ECB’s policies are really being felt are in the 20 million-plus homes and apartments spread across Germany, where befuddled savers are confronting a world out of balance, where saving money is suddenly no longer a German virtue, but a fool’s game for elderly Omas and Opas without a clue.

Euro Zone Rates and Debts-01


The low-interest escape from a currency meltdown has decimated German savers’ tried-and-true forms of low-risk investment.

Amid ongoing negative interest rates, almost 80 percent of German government bonds are now bearing negative interest, a total volume of €880 billion, according to data from Bloomberg.

Across the euro zone, there are €3.3 trillion worth of bonds with negative yields. In Germany, savers have packed €2 trillion into time deposits, current and savings, almost a third of all savings deposits in the euro zone.

But most people are earning little if any interest on this money.

Mr. Draghi’s lax monetary policy is a frontal attack on German savers, even if it was never intended to be.

German fund manager Union Investment estimates German households will lose €224 billion in interest over the next five years. And even this bleak outlook is based on the assumption that interest rates will be only 2 percentage points below the long-term average, which is very optimistic.

Low interest rates have also pushed up the price of pensions in recent years.

Olaf Stotz, a professor of asset management at the Frankfurt School of Finance, calculates that a 35-year-old man on an average income with a life expectancy of 79 years would have had to put aside €168 a month in 2007 to maintain his standard of living in retirement.

In 2015, he would have needed to put aside more than twice as much – €360 per month. That is equivalent to an annual increase in costs of 13.5 percent since 2008, which Mr. Stotz describes as “nothing other than inflation.”

While the ECB’s lax monetary policies are exasperating savers, they are good news for borrowers, particularly for countries with high levels of debt.

Germany’s DZ Bank calculates that the burden on Italy’s national budget was reduced by €53 billion between 2012 and 2015 thanks to the so-called Draghi effect. In contrast, Germany’s finance minister, Wolfgang Schäuble, has saved only €9.5 billion in interest payments since 2012.

One of Germany’s leading conservative economists and a persistent critic of Mr. Draghi and the ECB’s low-interest strategy is Hans-Werner Sinn, the head of Munich’s Ifo Institute for Economic Research.

Mr. Sinn has called Mr. Draghi’s strategy “the biggest redistribution of wealth in Europe since the post-war era.”

Wealth is being redistributed, Mr. Sinn has argued, from creditors to debtors, from financially strong to financially weak companies, and from rich to poor economies, without any parliamentary vote.

Across the euro zone, there are €3.3 trillion worth of bonds with negative yields. In Germany, savers have packed €2 trillion into time deposit, current and savings, almost a third of all savings deposits in the euro zone.

Under the ECB’s mandate, Mr. Draghi is determined to drive up inflation from barely zero to almost 2 percent, to keep the euro zone together and stabilize struggling banks, particularly in southern Europe.

He is pursuing this state of equilibrium ever more aggressively, yet so far he has failed to even approach his goals. Despite quantitative easing and negative deposit rates, inflation is still far from the ECB’s target.

Inflation in the euro zone was a measly 0.5 percent last June. In February, the rate dropped to a negative -0.2 percent, the same level as in March last year when the ECB began buying bonds.

A turnaround is not in sight, and long-term inflation forecasts are also being lowered.

jens weidmann mario draghi bloomberg jens weissl
Mario Draghi with Jens Weidmann, the head of Germany’s Bundesbank and a frequent critic of the European Central Bank’s loose money policies. Source: Bloomberg


Some of the euro zone’s big crisis-hit countries are even worse off than they were when the ECB began its quantitative easing program a year ago.

Greece could still run out of money by the middle of this year; Italy’s government debt is at 133 percent of economic output and rising, according to the latest figures, and Spanish unemployment is still more than 20 percent.

To be sure, European political leaders have done little to reform the vast, inefficient sectors of their own economies, fearful of a domestic voter backlash. Instead, they are increasingly laying the blame at the feet of Mr. Draghi.

The combination of political instability and stubborn resistance to reform is endangering fragile recoveries, with growth levels so weak that the euro zone is still far from its pre-crisis level of production, despite Germany’s strong performance.

None of the crisis-stricken countries – Greece, Spain, Portugal – has used the ECB’s low-interest rate gift to reduce their level of debt.

Mr. Draghi’s monetary policy is also complicating life for the euro zone’s banks, which are already struggling with a sea change in the global finance sector brought on by the financial crisis.

Not only are negative interest rates driving banks in crisis-hit countries into risky loan commitments, but bank earnings are also being cut even more as they pay interest on surplus reserves and their own interest margins fall.

All this may explain why Mr. Draghi appears to be going all in. But his critics are growing in number, amid lack of proof that his prescription is working.

Claudio Borio, head of the currency department at the Bank for International Settlements – the so-called “central bank of central banks” – believes the recent turbulence on global stock markets is a warning signal.

“The main reason for the pessimistic mood was the thought of a future with even lower interest rates, beyond all imagination, which could seriously harm banks’ margins, profitability and resilience,” Mr. Borio said.

Willem Buiter, the chief economist at Citigroup, does not expect any positive effects from the ECB’s strategy either.

Mr. Buiter acknowledges that further interest rate cuts or expansions of central banks’ balance sheets will affect the price of assets, but says that this will have barely any impact on the real economy, due to excessive levels of debt and a “zombified” banking system.

Banks have largely thwarted Mr. Draghi’s efforts to pump money into the euro zone to awaken an economic recovery. The Italian central bank president has criticized banks, saying they want higher interest rates to avoid making painful, politically unpopular but needed cuts in their own overblown businesses.

The tenor between the ECB and the euro zone’s banks has grown rawer.

John Cryan, the co-chief executive of Germany’s Deutsche Bank, warns that further cuts in deposit rates may lead to higher losses in banks’ deposit business.

Banks would then have to offset these losses, for example by making loans more expensive, which would be the opposite of what the ECB had intended, Mr. Cryan maintained.

This phenomenon has already been observed in Switzerland, where interest on deposits is even more negative than in the euro zone, at -0.75 percent.

Negative interest rates are already costing banks money, because they refuse to lend it out.

Not only are negative interest rates driving banks in crisis-hit countries into risky loan commitments, but bank earnings are also being cut even more as they pay interest on surplus reserves and their own interest margins fall.

Banks in the euro zone have accumulated almost €700 billion in excess liquidity. Analysts at Morgan Stanley estimate that a negative interest rate of -0.3 percent on deposits has reduced bank profits up to 10 percent.

According to Barkow Consulting, the reduction in the ECB deposit rate of 0.1 percentage points to -0.3 percent in December cost banks €1.4 billion a year. That is only likely to get more pronounced after Thursday’s additional cut to -0.4 percent.

Still, Mr. Draghi needs cooperation from the banks, because the ECB cannot inject money directly into the market but depends on banks to create “book money” by crediting money to customers’ accounts.

Mr. Draghi’s policy had a chance of working if banks would pass on the negative interest rates to their customers, but they are unwilling to do so for fear of losing business and deposits.

Experts are also warning about the creation of market bubbles created by the ECB’s massive injection of liquidity.

The Bundesbank, Germany’s central bank, has warned that the country’s real estate market is in danger of becoming overheated.

Bill Gross, the co-founder of U.S. investment manager PIMCO, has been warning since last summer of a major crash coming in bond markets, because highly-indebted countries like Italy can refinance themselves at similar conditions to less-indebted nations like Germany.

The stock markets are also apparently losing confidence in Mr. Draghi’s strategy, with Germany’s blue-chip DAX index down 12 percent since the beginning of the year, having gained 9 percent in 2015.

It is becoming clear to more and more financial market participants that the ECB’s generous supply of liquidity may be alleviating the pain of the crisis but is not addressing its root causes.

Thomas Mayer, a former Deutsche Bank chief economist who now runs asset manager Flossbach von Storch’s research institute, believes weak growth is a long-term effect of the financial crisis.

In the decade before the financial crisis, Mr. Mayer said, loans and debts grew faster than the economy. After the collapse of Lehman Brothers, it suddenly became clear that these excessive levels of debt were unsustainable, and the downturn in the credit cycle began.

Bad investments now need to be written off before loans can be provided for new investments. “But this unavoidable process of debt clearance will take years, if not decades,” Mr. Mayer said.

Mr. Draghi and his monetary supporters do not want to wait that long, and clearly subscribe to another theory, that of “secular stagnation,” recently voiced Larry Summers, the former U.S. Treasury secretary.

In a nutshell, this theory states that long-term economic growth has stopped because too much money is being saved and too little invested around the world. This leads to a drop in interest rates as money does not know where to go.

Mr. Mayer disputes the theory, arguing that such a policy is counterproductive because it not only delays necessary debt clearance, but actually triggers the next round of bad investments.


draghi reuters march 10
Mario Draghi on the way to the ECB’s governing council meeting on Thursday in Frankfurt. Source: Reuters


It’s not all bad news for Mr. Draghi, however: The euro has fallen significantly against the dollar in the last few weeks, meaning that one of the effects he had hoped for has occurred.

This is likely help boost inflation, as imported products become more expensive. European companies will also become more competitive. However, this effect will last only as long as trading partners at a disadvantage continue to play along, and a currency war is the last thing Europe needs.

This Thursday showed once again that the economic certainties of the past no longer apply. If you save today, you’ll be penalized for not consuming enough.

If you rack up debt, you’ll be rewarded.

It is no longer car sale figures that move automakers’ share prices, nor is it national debt that determines a country’s risk premium. What matters is what officials in the central banks are thinking about doing next.

No one would deny that combating deflation is one of the primary aims of a central bank, just as it must combat excessive inflation.

However, there may be justification for doubting whether the risk of deflation is really so acute. There are also significant doubts about whether Mr. Draghi’s instruments are the right ones to avert potential deflation risks.

Otmar Issing, the ECB’s former chief economist and today head of the Center for Financial Studies at Frankfurt University, believes concerns about deflation are exaggerated.

He says that the ECB is putting itself under pressure with its communications and that it should have more patience when it comes to reaching its inflation target, warning it is possible to “commit suicide from fear of death.”


Jens Münchrath is an editor at Handelsblatt who covers the European Central Bank and monetary policy. Daniel Schäfer is the head of Handelsblatt’s finance section. Kevin O’Brien is the editor in chief of Handelsblatt Global Edition in Berlin. To reach them:, and


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