The measures taken by the European Central Bank are often criticized in Germany. There is talk of dispossessing savers, the inadmissible mixing of monetary and fiscal policy, and a backdoor path to a transfer union. Some also charge that the ECB’s monetary policy is ineffective, because inflation persistently remains below the targeted level of just under 2 percent.
But it is also understandable that ECB President Mario Draghi is offering energetic counterarguments. The rate of inflation, he says, would be even lower without his “unconventional monetary policy.” And, of course, Mr. Draghi stresses that the ECB has by no means exhausted its resources.
The key question now is whether the ECB will truly come closer to its goal with additional rate cuts and bond purchases. In fact, there are growing indications that its monetary policy could even have counterproductive effects when it comes to stimulating growth and inflation. There are several reasons for this.
First, negative deposit rates harm the banking system. On balance, they weaken the activity of banks and curtail the creation of credit. Tighter regulation takes things one step further. For the ECB, this signifies a weakening of precisely the sector that is responsible for translating monetary stimuli in the real economy. Bank lending will remain too weak to stimulate inflation to a significant extent or provide an impetus for growth.
Rate cuts stimulate growth to a certain point, but the effect can be reversed by the time interest rates enter negative territory.
Second, the monetary policy shifts the balance of saving and consumption. The massive purchase of bonds causes yields to decline across the board. Investors who are unwilling to take risks beyond a certain level are suddenly faced with the prospect of earning no interest at all. Those who make no concessions, for retirement savings, for example, will have to set aside more of their income, leaving them with less disposable income for consumption.
This effect also curtails growth and inflation. Apparently, successful monetary policy is mainly a question of the dose. Rate cuts stimulate growth to a certain point, but the effect can be reversed by the time interest rates enter negative territory. Likewise, bond purchases can reduce financing costs, thereby removing pressure on governments or companies to make investment attractive.
But if yields decline by too much, the negative effect for savings could predominate. It is clear that without the ECB measures, the inflation picture would probably be much gloomier. However, the ECB is paying a high price, because even lower interest rates and/or higher bond purchases could further amplify the risk of economic stagnation and zero inflation.
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