Back To Top

[Tyler Cowen] In defense of the German saver

If there is one thing the world should have learned over the last decade, it is that politics is usually more symbolic than pragmatic. A good policy attached to the wrong symbols can fail, while impractical or even irresponsible leaders can succeed by promoting popular symbols.

And yet this is a lesson we are still learning. Take, for example, the policy of the European Central Bank to charge negative interest rates, currently at minus 0.4 percent. Practically speaking, this does not bring big macroeconomic gains, and as symbolic politics it is proving disastrous -- most of all in Germany, where it is turning people against the eurozone.

Step back and consider the cultural context. Germany is still scarred by the memories of two world wars, fascism, communism, deflation and hyperinflation: in general, huge instability. Since the end of World War II, however, personal savings and the banking system have been an oasis of predictability and a driver of growth. Many Germans treasure their frugality, perhaps excessively or irrationally, and it has become an important part of the narrative Germans tell themselves about the economic order they have built.

Now enter the ECB, in essence telling Germans (and others) that savings are a bad thing, to be taxed and penalized. The very word “negative,” as in “negative interest rate,” makes the policy hard to sell politically. The German word “Strafzinsen” refers to a penalty rate, but the root “Straf” also refers to punishment, and it was used effectively by Franz Kafka in his famous torture-laden short story “In the Penal Colony.” One German newspaper referred to the “final expropriation” of the German saver, noting that the ECB’s decision to deviate from its inflation target carries “grave consequences.”

More generally, a significant segment of the German population is upset or outraged by the policy. There is even a claim that the revenue from the negative interest payments will be used to finance other EU countries.

Most economists and central bankers view negative interest rates as an acceptable tool of macroeconomic management. Maybe so. But in an era when trust, including trust among nations, is much lower than previously thought, it probably isn’t a good idea to place a punishing new tax on the German national virtue of saving. Central bankers must also be sensitive to public relations.

Still, there remains a question: Might these symbolic problems be outweighed by the practical benefits of negative interest rates? The basic idea is that if banks are taxed for holding reserves at the ECB, they will make additional loans instead, thereby stimulating the economy. But there is a downside: Negative interest rates reduce the interest rates banks pay on deposits -- those can become negative too -- and many deposits may flee the banking system altogether. That leads to disintermediation and economic contraction.

The ECB currently views the expansionary effects of negative interest rates as outweighing the contractionary effects. But this is a policy for stimulus in a short-run emergency, not one that should be used for (so far) five years. Taxing financial intermediation isn’t the path toward higher innovation and job creation, and even if there is temporary stimulus from the policy, it may be cloaking the more serious long-run growth problems facing both Germany and the EU.

So if a policy of negative interest rates is just a Band-Aid, it is one that should be ripped off. And if monetary policy is insufficiently expansionary, that is going to require an increase in the ECB’s inflation target, or a move to nominal gross domestic product targeting, not a jerry-rigged tax on deposits.

There is also an argument that Germans are saving too much. But by some measures, they have a level of national wealth relatively low for their per capita income, in part because Germans are less likely to own their own homes. According to the Organization for Economic Cooperation and Development, Germany’s nearby neighbors Sweden, Denmark, the Netherlands and Switzerland all save more in percentage terms than Germany does.

In any event, if a reduction in the German savings rate is in order, any policy addressing it should probably come from the German government, through higher expenditures on Germany’s ailing infrastructure. It is not the job of the ECB to correct the economic and cultural misconceptions of every European nation. Sometimes the ECB simply ought to “go along to get along,” to invoke a common English-language phrase.

Most German citizens who complain about negative interest rates probably do not have a deep understanding of macroeconomics. But they do have a pretty good intuition of when something is just not right. In this case, they are onto something. 

Tyler Cowen
Tyler Cowen is a Bloomberg Opinion columnist. -- Ed.