The ECB’s Dilemma and Our Savings

The European Central Bank surprised (almost) everyone by fully entering into the unknown world of negative interest rates. I am not going to discuss the details of the ECB’s decision, for that I refer to a table at the end of this article. I want to address a key issue here: Why is the ECB so willing to destroy our saving plans?


For an average individual with positive savings, the law of compound interest is history. Liquid assests are not able to provide decent returns, not even in nominal terms (don’t forget we are experiencing deflation in some Euro countries). Risk appetite is a natural consequence of the zero interest rate environment and it will get worse as baseline rates turn negative.

Deflation is a symptom of a more general economic malaise and, like high fever, it must be averted. High fever may cause brain damage. Similarly, debtors suffer from deflation because debt is indexed in nominal terms and their income shrinks with lower prices. If you avoid reading this fact with moralistic attitude but rather through economic thinking, there are many reasons to take bold action against deflation.

So, why should creditors and savers suffer? Actually, net savers must suffer, because aggregate savings are too high. Germans complain that Draghi is playing with their savings. On Friday Handelsblatt, the main German financial newspaper, titled: “Mario Draghi Dangerous Game with German Saver’s Money“. Germany’s record trade surplus goes hand in hand with an excess of savings, that contributes to depress demand in the whole Eurozone. Excessive savings is a global problem (search for “savings glut“), but in Europe it is particularly acute.

“Mario Draghi’s dangerous game with Money of German savers” Handelsblatt titles.

In the current economic circumstances we, net savers, are part of the problem, not of the solution.

Besides the problem of lack of demand, let’s not forget that the ECB is in the middle of a currency war and it is top priority for the central bank to keep the Euro low compared to other currencies. Given that China and Japan are undertaking very aggressive monetary policies and the US has the power to do more, for the ECB not following this expansionary trend would risk an appreciation of the Euro and a consequent damage to exporters and to the fragile recovery.

The measures taken by the ECB will have little real effect. Yet, I dont think Draghi had no room of manoeuvre to do otherwise.

ECB’s plan released on March 10. Source: Frederik Ducrozet (Twitter).

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