Zero Interest Rates in EU: The Myth of the Poor German Saver

Yves here. We’re featuring this post primarily to highlight how little wealth most Germans have, despite Germany’s status as an export powerhouse. On the one hand, this may not seem as big a deal in the US, since in Germany most people rent, tenants have strong rights, and rentals are low by Anglo-Saxon standards. Germans also have better social safety nets than Americans. While bona fide jobs are more secure than here, although Germany is also seeing growth in temporary and short-term employment.

The reason for pointing this out is that is not as widely recognized as it should be that ordinary Germany workers have been badly squeezed. Real wage fell in the early 2000s, reducing purchasing power. As Josh Rosner pointed out, it represented a transfer of income to domestic exporters and banks. German taxes also hit consumers and let corporations off easy.

Thus the logic for German politicians regularly blaming Eurozone problems on lazy Latins rather than the inherent flaws of the project and Germany’s refusal to address its own contradictory wishes, namely running large trade surpluses while not wanting to fund their export partners, becomes obvious. Germany’s leaders need an external enemy to blame for how German workers have been squeezed for so long, well before the crisis took hold.

By Thomas Fricke, Chief Economist and a member of the ECF leadership team who focuses on the ECF’s efforts around managing the transition to low-carbon economy. Originally published in German in Spiegel Online; cross posted from the Institute of New Economic Thinking website

Panic over the impact on German savers of low interest rates and looming inflation neglects to mention that very few Germans are saving much

The German saver is suffering! The European Central Bank ought to make policy for the Germans again! That naughty Mario Draghi; those poor Germans! Maybe we should just exit the EU; it’s en vogue at the moment, after all.

Thus the lamentations sparked by interest rates on savings dropping to zero, and news that inflation is coming.

Of course, there are now Germans who have more debt than savings. They won’t have to suffer too badly, of course. On, the contrary, they may even be glad to (with a bit of luck) actually pay significantly less interest than in the past on their credit, while at the same time the value of their debt diminishes due to inflation. According to estimates by the German Institute for Economic Research (DIW), this applies to no less than every fourteenth adult. They have “negative assets”, which clearly sounds better than to have debt.

Admittedly, a relatively laid-back reaction to the vanishing of rewards for saving their money can be expected from citizens with no assets whatsoever — after quite a few years of loss in real income, they simply have no money to put in the bank at the end of the month. According to DIW statistical evaluations, this is the case for at least another 20 percent of the country’s population. Add it together with the “negative asset” holders, and you have almost 30 percent of the population.

If to that 30 percent we add those that now and again transfer a few euros but nothing really substantial to their savings account, we arrive at roughly 50 percent of Germany’s population to whom it essentially makes little to no difference whether any particular interest is now set at zero percent or some non-zero percent. The savings of half of Germany’s households amount to less than €17,000.

Then there is the other half. Are they suffering? To be fair, one has to subtract those from the list of sufferers who have enough money available so that they are not checking their savings accounts nervously all day long, but have invested a good amount of their dough in stocks or bought this or that little piece of property. To put it in figures, of the 25 percent who possess more than €100,000 beyond their requirements for living (a group that owns, easily, 90 percent of all assets in the country), there should only be a few nitwits who have deposited all their dear money at a savings bank. This group should be relatively at ease with the audacious zero interest rate, especially when taking into account that zero interest rates have greatly contributed to an almost 150 percent surge of the German stock index DAX since the beginning of 2009.

Note: According to DIW economist Markus Grabka, about two-thirds of the total assets in the country are tied up in real estate. A similar logic is at work here. Again, zero interest rates, if they had an impact at all, brought about a rather miraculous effect by significantly boosting property values. The term “suffering saver” hardly applies to this well-off group of German citizens.

Roughly calculated, the real sufferers add up to a quarter of the country’s population. They are those citizens who are neither indebted, nor have any accumulated capital yet — or too little to deposit in a lousy-interest-paying savings account or invest in government bonds.

The do-gooders like to fight for minorities, and in the case, those suffering from low interest rates are also a minority — but well-off one.

And we haven’t yet covered all the facts. A recent calculation by the Bundesbank reveals that without such extremely low interest rates since the outbreak of the financial crisis, the local treasurers from the federal, state and local governments would have had to pay €240b more to cover the interest on our national debt. Which means that our German finance minister Wolfgang Schaeuble would never have achieved the “black zero” in balancing the federal government budget – a dreadful thought – or otherwise would have had to raise taxes to achieve this goal.

There’s a good chance that if we’d had higher interest rates, we would not have nearly as many savers today. After all, it is with good reason that clever economists point out that not cutting interest rates during a similar crisis in the 1930s contributed significantly to the escalation of the economic crisis, including mass unemployment and impoverishment. When a major financial bubble bursts, lower interest rates can help ward off a dangerous wave of bankruptcies. And where investment is scarce, interest rates are low anyway. In the end then, it is good for everyone that interest rates are so low — even for the savers. Those who end up on the street won’t have anything to save anyway. Let’s rather save at zero percent interest rate. Thank you, Draghi.

That being said, the next question is whether the money mobilized by the central banks should go directly to households instead of to wealthy stock and real-estate investors. However, this is another topic. At this point the world truly has much more urgent problems to deal with.

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  1. Jim Haygood

    TARGET2, comrades: capital surplus Germany has a positive balance of €754 billion. The Big Four capital deficit countries (Italy, Spain, Greece, Portugal) collectively have a negative balance of €829 billion.

    Basically, these mirror-image surpluses and deficits reflect Germany’s vendor financing of stuff sold to the periphery.

    Sustainable? About as sustainable as Germany’s WW I reparations were. Something’s gonna break.

  2. Altandmain

    Basically the massive trade surpluses that Germany has run have not translated into prosperity for the German people is what has happened.

    They need to end austerity, go back to balanced bilateral trade, and invest in a large domestic market.

    Of course that won’t happen because the rich don’t want to lose their pilfery.

    1. Left in Wisconsin

      But there is a much bigger problem. The huge trade surpluses can only be turned into higher domestic wages if German employers are entirely foreclosed from relocating out of Germany. I have touted many times the requirement that German employers negotiate “social pacts” with workers to offset the costs of job loss, which do a much better job of deterring outsourcing than anything we have here. Still, they don’t make outsourcing illegal, just more costly. In the real capitalist world, there is nothing about corporations and banks (German in this case) making mega-profits that means they will elect to reduce profits if wages are seriously raised.

      As best I can tell, the German unions (principally IG Metall in the export sector) still do not feel that they have the leverage to negotiate seriously higher wages, and my guess is that they are correct.

      Basically the massive trade surpluses that Germany has run have not translated into prosperity for the German people is what has happened.

      Unfortunately, in the export sector prosperity is relative to the competition, not absolute, and German workers are still the best paid (or among the best paid) in the world, despite the lack of significant wage growth in recent decades.

      1. PlutoniumKun

        Why the German unions have been so weak and reluctant to ask for big rises over the past 10 years or so has intrigued me. The corporate profit figures cry out for big pay rises for German workers – not just for the sake of German workers, but as part of European economic balancing. I suspect its the threat of relocations to eastern Europe. There is little difference now in the quality of products created by German owned companies in the East and in Germany (just look at Skoda cars, VW parts, VW quality, 20% cheaper).

        1. Mark P.

          This is an important part of the picture that not enough people talk about. German manufacturers have been moving substantial parts of their production facilities to places like Romania and elsewhere in Eastern Europe, where the work force is just as well-trained as German workers and costs about a third as much.

          1. digi_owl

            While importing cheap labor for domestic services jobs from anywhere they can.

            Sadly the (champagne-)left is sitting there and letting it happen because they are deeply wedded to the whole EU equals European peace idea. While the racists steal the left’s old arguments to cover up their xenophobia.

            Its a mess and then some, and who knows when the dam will break…

          2. David Barrera

            So much for the German stakeholder version of shareholder…. Let me sound like Marx now: a global labor reserve does wonders for capital

    2. visitor

      For years, Heiner Flassbeck has been harping about those points.

      He also remarked that when we compare today’s creditor position of Germany against the rest of the world with the succession of trade and service balances since 2000, there is a massive discrepancy. The creditor position is much lower than the cumulated sum of those net balances.

      A major reason is that foreign currencies lost value against the euro (a mechanical effect of a major trade imbalance). As a result, Germans will not even benefit from their massive commercial performance: eventually, either they will not get paid because their foreign buyers, including eurozone ones, are bankrupt; or they will suffer a currency exchange loss when they wind up positions with foreign, non-eurozone debtors.

    3. Uwe Ohse

      Basically the massive trade surpluses that Germany has run have not translated into prosperity for the German people is what has happened.

      of course. A trade surplus is just that: a trade surplus. To translate trade into wealth you have to get something back. A something having worth, not just a promise.

      A trade surplus is a bet on the worth of things or services that other sides of the trades will pay back some time in the future. Which may happen, or not, i don’t know. Your guess is as good as mine.

      Ending austerity won’t happen. Not just because the rich are against it (which quite a number of them certainly are not), but because the whole political establishment in germany can’t even think of doing something different.
      Besides they’d need to do something about their economic illiterateness, and i can’t even remember one german politician who learned something radically different while being on or near the top.

    1. UserFriendly

      Hard to feel bad for people because they eked into negative net worth when I will never have a positive net worth in my lifetime. I wrote one hell of a comment to the NYT about that piece. Millennials in this country are all vapid, lazy, tech obsessed slackers slowly destroying one industry at a time with our stubborn unwillingness to buy shit. Save all the sympathy for EU millennials with their free college and healthcare when things have been just as bad here. I honestly hate every last thing about this corrupt oligarchy of a country.

      1. Stelios Theoharidis

        While it is not all of millennials and it goes against the constant stream of programming from television (many of us don’t watch much of that anymore) but collectively not buying anything and putting the money that we do have into businesses that provide net positive social benefit, banks that don’t steal from consumers or finance rapacious resource exploitation, recycle materials (vintage / used goods), build gardens to restore soil carbon, etc. This is certainly to be distinguished from white / green wash consumerism. Urban areas are starting to work on internet systems that are non-profit. There just need to be more competitors for other infrastructure / energy providers, which is likely to be a major challenge. Hopefully our ‘lazy’ social conventions will drain the the machine of the oil it needs to function, which is ultimately just our blood and work. I hope that is some solace for the anger that you feel.

      2. Altandmain

        Not true.

        British students do pay for their tuition:

        Even in the places where university is free, people still get into debt to pay for their living costs. That said, there’s no doubt mainland Europe is better, but it is still very bad job market wise.

        Same with Canada and tuition is expensive here, especially for professional programs.

        Plus healthcare is under siege, especially in the UK where there is talk of privatizing the NHS.

  3. LT

    Without discretionary spending for people’s “wants,” capital is aquired for predation on people’s needs. Enter the rentier global economy of passive income…

  4. /L

    The meager wealth of ordinary Germans is not despite being an export power house, it’s because of it. To achieve these abnormal foreign surplus Germany have to keep its domestic economy down so it doesn’t import “to much”. They are intelligent enough to have fairly well pay in the export industry, it’s the rest they keep down with mini jobs and increasing poverty and crumbling general infrastructure.
    The gains of the export power house goes to the top end of town. In a modern industry nation as Germany high in the value chain, labor is a minor part of the cost and total labor force. That booming export would spread in the domestic economy by the gains of the workers there is a thing of the past when industry was labor intensive. Maybe the economists’ macro models would upgrade on that someday. In modern economy to force foreign surplus is a loss for the country as whole.

    1. /L

      Germany is obsessed with export surplus, they are probably aware of the facts in MMT that the only way to avoid gov. budget deficits is to have foreign surplus. And to “print” to make the economy as whole rolling is out of the question.
      So, Germany is in a permanent trade war with the rest of the world. And they dupe their population that they are the winners of this nonsense. But some people must make sacrifices in the war so the Germany as a nation can be a winner.

    2. /L

      Probably Germany have great concerns on Brexit, Britain is a major export market. And then when Trump say he will make an end to USA as a trade deficit nation it threatens the very foundation of the worlds export surplus tigers. The US trade deficits is the foundation of their wealth. Their wealth is founded on deficit dollars created out of thin air, every surplus have an equal deficit. That they could “print” their own money doesn’t seems to be something they consider. Japan have taken a much more sensible stance since the 90s crash.

      1. european

        Most Germans are proud of their record export surplus. They identify with it. They are proud of their stagnating wages too, because that’s what made Germany great again, you see.

        This also explains (in part) why they want Greece to suffer so badly for their sins of rising wages and imprudent borrowing. Because if they got away with it, what’s the point of the holy Lohnzurückhaltung?

  5. Disturbed Voter

    Beggar thy neighbor is not a new phenomenon. Free trade today is negotiated “beggar they neighbor” … though the membership of “neighbor” can be both within and without one’s national boundary.

    1. Scott

      I think you are saying what I think. International Labor is beaten down by International multinational corporations & their multinational partner banks. Nations that actually want to protect & aid their own peoples demand Marx Industrial Service Banks.
      I’ve read that the power of the Asian Tiger came from the demand that the banks function so, whether or not they got the concept from Marx or not.
      Pragmatic eclecticism is damned difficult in a world of ideologues & demagogues.

  6. Gaylord

    Human wealth and income disparities pale in comparison to our escalating “debt” to the ecosystem, which will crush all of us.

  7. Persona au gratin

    Germany was always the European “fair-haired empire in waiting” until the US came along. Its relative “backwater” status, reinforced throughout the 20th century, first by British and then American dominance, is reaching the boiling point now with EU constraints; but lo and behold, there’s a new/old regional hegemon emerging once again just to the east, just as there always was.

    Germany has merely been dallying with the attractive (US) suitor at the dance all these many recent years, rather than dancing in earnest with the rather more demanding but entirely more suitable prospect who brought them to the dance in the first place.

  8. David Barrera

    For instance, the same week Yes to Brexit won the referendum, ECB issued to banks in the EU 399 billion euros at 0%. Of the 399b, 368b was used by the banks to refinance-evidently now at a lower rate-their own debts(all this information according to Fitch and reported by Spanish newspaper Expansion). Next issuances by the ECB came with an incentive-caveat: a 0.4% return reward (which matched the rates on bank deposits), to those banks lending the funds out “to the real economy”. Well…this is quite old, a few centuries old. The supra-state must capitalize those who have the prerogative to be first in line and seemingly there are clear inherent benefits to it just by virtue of order. Next we could talk about corp stock buybacks, the impressive Wall Street Capitalization since 2007-8, the unmediated new technology coming upon us financed at ridiculous low corp bond rates and so on. Quantitate easing? Low rates? …Bernanke’s helicopter did not fly over our homes

  9. nothing but the truth

    so bad mouthing germany will make its export surplus disappear?

    this is a real phenomena, with surely deep causes in the real economy. is potty talk the only solutions economists have for this?

  10. tiebie66

    It is ncecessary to inject a note of balance into the debate here (see below). Also, I have moved to a “lazy latin” country and, without a doubt, it does not function efficiently. Every time I encounter problems, it distresses me to think how big a burden these inefficiencies are on a nation-wide level. I wish I could quantify this, but, to me, it would seem to have a substantial impact on the country’s “comepetitiveness”. In nearly 9 out of 10 beaurocratic processes there are mistakes, meaning that they have to be repeated, causing delays, and causing other problems downstream. How this obvious need for reform can be so easily dismissed puzzles me. For me, posts such as the present one will have much more credibility if it were more comprehensive. At the base of it, I would think an inefficient society will be/end up more poor than an efficient one. Just throwing money at the inefficient society might remove any incentive to change. So how about a post on the effect of efficiencies on wealth? (Something beyond “the Greeks work many more hours than the Germans” – standing at kiosks rather than making machine tools.)

    The other problem I have is that Germans are supposed to consume more. What? More olive oil? Or more of their own cars, meaning less would be exported and the country would become pseudo-autarkic? They can only realistically consume more if other countries improve their competitiveness and provide something of similar value in exchange.

    “The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position,” he said. “When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus.”

    “I promised then not to publicly criticise this (policy) course. But then I don’t want to be criticised for the consequences of this policy,” Schaeuble said.

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