The ECB is making a huge push, without any kind of democratic consent, towards a finance-based, American/UK-style financial system. This won't work because German savers have virtually no experience of such a system.
All that will happen is: banks go bust (more bust, most German banks are insolvent), and savers lose all their money. Either they hold their money in banks or they take it out and lose it all doing stuff they know nothing about (if we don't have an immediate recession, you will see French investment banks swarm Germany...French bankers have some kind of innate ability to produce bullshit derivatives aimed at savers with a conservative bank-led culture of saving).
It is kind of insane that we have got to the point where policymakers actively ignore markets. All that matters are the textbooks. But this doesn't work. You can't just transplant economic policies from another context and expect them to work the same.
That said, it will be nice to see Germany return to the early 2000s. Objectively, Germany has one of the most vulnerable and poorly functioning economies in the G10. Combine this with utterly insufferable, self-important policymakers and you have quite a nice example of natural justice.
European finance is bank based. Banks make most of the loans. Bank managers decide which projects get financed and which don’t. Investors put money in banks and let the banks make decisions.
American finance is market based. Bond buyers make most of the loans. Bond (and stock) investors decide which projects get financed and which don’t. Investors themselves make decisions.
Broadly speaking, the European bank-based model is moribund. It concentrates risks and is too conservative. The ECB is trying to change this, but it involves changing a social contract around how investors behave. This has happened without a broader debate, because Europe, and now we’re seeing a backlash in Germany.
https://www.ecb.europa.eu/stats/ecb_surveys/survey_of_profes...
It's not the ECB that is being unreasonable here. It's Germany. Why on earth would you run a balanced budget while getting paid for borrowing? That is just irrational beyond belief.
Fiscal policy is a national matter. It is Germans who need to have that debate you're talking about without constantly blaming the ECB for their own failings.
You still need to pay the money back after you invested it. If those investments don't make a profit, you're in trouble. I mean, they could park it in ... maybe bonds? Oh wait.. ;)
There also no telling what the future brings. Borrowing to the limit while times are good leaves you no room when times are bad. A recession is on the horizon, it sounds foolish to shoot your powder before it hits.
Times are bad. Germany is very likely in a recession right now and they have fallen back technologically. Now is the time to spend some money and it was never cheaper.
Also, I think spending money is too slow anyway, especially if it is spent on infrastructure, technology development, retooling an obsolete auto and energy sector, etc.
In my view, they are already very very late.
The analogy doesn't hold since burning wood doesn't help shorten winter.
It's exactly like that. They save not because "omg saving is so cool", they save for rainy days. Germans value predictability and security over short term consumption, though that is changing slowly.
It's hard for individuals to save the way squirrels do. Farmers could do it, but that's it. Now it requires governments, and Germans elected a government that refused to do it, and instead imposed balanced budgets instead. Now they are suffering the consequences of that.
Because later you will have to refinance your debt on worse terms.
Since the inception of the Euro it's been clear to anyone with an economics education (not me, but this is the impression I've gotten reading commentary from anyone respectable), that Europe has some serious flaws (from a financial perspective) that will take decisive action to fix. One of those things is that Germany needs to start spending more. Unfortunately I don't see it happening. But I'm crossing my fingers than Macron can somehow pull a miracle.
> One of those things is that Germany needs to
> start spending more.
Especially on the individual - many will ask: Why spend, when you save for "bad times" or your kids' future? And more recently: Why spend, when you want to reduce your footprint on this planet?
Yep, at least in tech, German salaries are stupidly close to Eastern Europe now. All this because in EE the free market kicked in and did it's thing, forcing employers to compete for talent while German companies artificially cap salaries to fixed grids while complaining there's a talent shortage and pushing for immigration instead of wage increases.
The Euro isn't sensible from an optimal currency perspective. In a good currency union, labour will be extremely mobile. But though labour can move freely in Europe, people tend to prefer their home country. Contrast to the US where people move much more readily and follow jobs.
So monetary policy has been too tight in areas like Greece that would have simply devalued their currencies in the past. Meanwhile policy seems to be too loose for Germany.
If you want to keep the monetary union, you can't crush Greece and other southern countries. So the Euro must devalue a bit to help them. But this cuts interest rates in Germany, discouraging spending.
Hence "Germany must spend more". It's more of a mechanical statement than a moral one.
Also spending could be using capital to buy a business abroad or infrastructure or somesuch, I think. Needn't necessarily be consumer goods.
Btw I think you've got a typo:
> for the euro to work, Germany must save more
In america, when a state has low revenue or high cost, it is subsidized by federal taxes. I.e., people from richer parts of the country "pays" for the poorer parts (e.g., infrastructure, or education etc).
In eurozone, this is rarely the case. I think a person in the US won't bat an eye if taxes are redistributed to a different state, but the amount of backlash that eurozone sees from this sort of redistribution (see brexit - they even believe in lies because it conforms to their worldview!).
Until the eurozone culturally and societally accepts itself as a single country with a single identity, there cannot be financial unity. Euro is a failure because of this imho.
You're framing this in moral terms whereas it should be viewed as more in economic terms. Spending by Germans creates more demand for Goods and Services, encouraging economic booms in the rest of Eurozone. These developed countries would then develop the skills and accumulate capital to compete with their peers in Asia. That would be a huge win-win from a European perspective.
Honestly, this shouldn't be viewed as encouraging the average German to spend more of their savings, rather, the German Federal Government borrowing more + spending heavily on infrastructure building in Germany + the rest of Europe.
Sure the € would depreciate a bit but there have already been currency fluctuations that did not show a big positive effect on the malingering economies.
In theory. In practice however, all that negative rate money that people will borrow will all go to real estate causing the already high prices to skyrocket overnight while wages stagnate.
Goods and Services are already cheap enough that we don't need loans for.
When rates were high, property prices in Germany were cheap or at least reasonable as they were pegged to the income levels. When rates went down property prices went to have no correlation to salaries anymore as now every average Joe and his mom could go to the bank and max out a 30 year loan on as big of a house his bank could afford to give him.
That's how Germany went from being one of the cheapest housing markets in Europe to one of the most expensive in the last 10 years.
Why spend, when you save for "bad times" or your kids' future?
By spending you keep companies in business where your kids will be able to work in the future. We often see a moral version of this argument framed as "buy local" or "buy American|German|Whatever"
Why spend, when you want to reduce your footprint on this planet?
Often lower impact choices cost more. By deliberately spending more money on lower footprint choices you are helping the planet. Good examples of this include high-efficiency appliances, extra house insulation, sustainable food sources etc etc.
A moral arguement towards spending is looked at like you are trying to sell them sonething and/or fleece them. And they are technically right about that - accumulating wealth is what makes an individual rich.
Investment in the actual sense would be a win-win. Not speculation or buying goods for the sake of getting cash flowing but things which provide a return. It is similiar to why lending out money/buying stocks is infinitely better as an investment than just holding gold - they provide utility. Gold just sits there.
Of course investing reliably and safely is hard, especially when the behavior of others impact it and nobody has perfect information.
Negative interest rates pulls that out under the rug, and forces people to take on extra risk than they currently do.
This doesn't seem like a reasonable assumption to me.
If you spend $ to reduce your carbon output for example, the money circulates among other people, who average about the same usage of fossil fuels as the general population because after a few exchanges they are the general population. So if you are increasing your spending in the long run, you are increasing resource usage by that amount, no matter how virtuous the things you are spending it on.
That doesn't mean it's wrong to invest in something that saves you money in the long run, but if there isn't a payoff, then by default you shouldn't think you're helping the environment.
This is a second order result, and doesn't necessarily follow. For example, higher quality goods generally last longer, which reduces waste. Higher profit margins also lead to more room for sustainability in supply chains. Apple is a good example of this.
Richer people also generally have less children, which reduces the environmental impact further.
All in all I'd say that second-level effects are guessing at this point.
Sure, but I think it's ok to think about ways in which spending more can help. The OP did ask that question after all..
More generally speaking, Germany has excess saving and insufficient spending which creates problems for the other members of the Eurozone. Excess deficits are bad, but excess surpluses are also not good.
What really happens is that 'savings' have two sides to them, and the other side is debt. So when people's savings go up by 10B, 10B of debt is created somewhere else (bank loans, government borrowing, etc) that enables that.
Having things work this way makes some intuitive sense. Savings are really a promise for goods & services in the future, so it makes sense that you have a matching promise to (forgo) goods & services in the future to counterbalance that.
In Germany's case, it's possible for the public and government to both save in aggregate only as long as trading partners go into debt (in euros). But if the debt becomes unsustainable, you will lose your savings that are the other side of that debt.
Now, everyone can try to save at the same time, but because it's impossible it doesn't work and you just go into a recession. That is, everyone stops spending, people lose their job, and even though they want to save they can't, so the impossibility is avoided.
Even though the basics aren't extremely complicated, it doesn't work like a household, and in many countries the average level of economics education seems to be about zero. There's a lot of public sentiment that everyone should should just save up and pay down debt, even though it doesn't make much mathematical sense how that could happen. I think there's a good chance people are elected at some point that handle things very badly.
On an single individual level there's no reason to avoid saving, it's a good idea. But someone has to take on the debt on the other side of that saving. If no one wants to (including the government), it seems reasonable for interest rates to trend negative.
b) insufficient aggregate demand can be a huge problem leading to recessions. What is sensible for the individual might not be sensible for the economy as a while.
c) Germany's infrastructure is decaying, and rates are as low as never before, even negative, ie the market is willing to pay Germany to borrow. Yet Germany refuses to borrow. It's perverse. Of course, unemployment in Germany is relatively low, but in Europe it's high. Some big construction projects in Germany would be a win-win.
Doomed is a strong word, what does it mean? Sure, there are flaws in the common currency and the ECB policies might fail. Europe might be the next Japan for the upcoming decade with ±0% economic growth, that doesn't make it doomed.
The Euro could dissolve in lieu of national currencies. Borders may be redrawn and remilitarised.
Monetary problems tend to prompt populism. That comes with its standard variants of nationalism, fascism and racism. Harsher customs are the least of our concerns from this side of the Atlantic.
The EU might well be doomed - it seems that's actually what you meant? I've noticed it's quite common for the EU's biggest supporters to use the word "Europe" when they mean EU, but please don't do that. It's a poor use of language and can come across as deliberately manipulative: attempting to graft the permanence of a continent onto a transient political institution. It really grates.
As for the financial flaws. The flaw is not that Germans must spend more but the other countries must spend less. Mere spending is not a useful goal - the ECB is trying (apparently successfully) to force Germans to spend their savings only to wallpaper over the fact that the EU member states continue to have lethargic economies that don't produce much worth spending money on, and to kick the can on a huge debt crisis.
Macron can't do anything - he's in no position to dictate to the Germans what to do with their money. Unfortunately the poor Germans, who are already owed vast sums by the rest of the EU (see: TARGET-2 trade imbalances), are probably going to end up losing all their savings to fund southern/French lifestyles for another decade or two. Their emotional commitment to the EU allows them to be financially exploited without end.
Small is beautiful. Let's start by restoring the primacy of the country as an organising unit. Where there are no actual disagreements in policy, they can recognise each others standards and avoid trading friction. Where disagreements over policy do occur, then deviation in those areas should have no impact on unrelated areas.
The EU has become a monster that is willing to cut ties with important European countries entirely if they refuse any aspect of its dominion. Relations with both Britain and Switzerland are on the brink, despite both countries trying hard to be best friends with their neighbours. The EU is actually imposing trade sanctions on Switzerland because of a disagreement over something related to trade union law, so I expect it to get much worse in future as the EU continues to maintain near-totalitarian "with us or against us" politics against them.
Every attempt to unite Europe under a single government has led to disaster. This time around will be no different.
- A Brexit voter
I don't think anyone wants the EU to become another Soviet Union. EU believers want a United States of Europe(more or less).
Small might be beautiful but it's weak. It goes with the wind. (i.e with the U.S, China, Russia). Brexit will only move UK closer to the US than to the continental Europe.
U.S doesn't use the same "with us" or "against policy", right? I heard U.S doesn't impose sanctions due various disagreements either... good luck! You forgot the Suez Crisis so fast!
Despite that I would have recommended Scotland vote to remain a part of the UK. Inconsistent? To a point yes, but with better technology, I might have changed my mind.
One key problem with fully splitting the UK is there's no identity card system so no chance of an internal border. If Scotland had split from the UK, its economy would have rapidly collapsed because the SNPs economic plans were all based on a relatively high price of oil and the oil price collapsed a few months after the referendum. A socialism driven economic collapse in Scotland would have caused a mass influx of Scots into England with no way to identify them or send them back. With an ID card it can be more like in Europe where you have to register, and there can be some notion of a soft border. Same applies for Northern Ireland.
I'm not sure why you think small means weak. Germany would seem to have disproved that notion twice in the 21st century. At any rate, I'm not arguing against military alliances, and given the only armies in Europe that are worth anything are the British and French, the EU will soon be relying almost entirely on France.
Or perhaps you have bought the idea that small countries "have" to sign trade deals with bigger countries. That's simply false.
Finally, what EU fans want is irrelevant. It's what they'll get that matters. Do you see the EU ever respecting a vote that doesn't go it's way? Do you see any real movement towards putting the EU Parliament above the commission and ECB? No, the "parliament" is a sham and the EU's response to democratic rejection is to ignore the result or try and force the population to comply.
You're going to get a new Soviet Union whether you want one or not. The inertial direction of travel is quite clear.
I'm not looking to convince you that EU is better than you think but this[1] open letter may help you understand some subtle differences between EU and SU.
https://ec.europa.eu/commission/commissioners/2014-2019/andr...
I don't recall any talk of ID cards or transitional periods to sort things out during the Scottish Indyref. Perhaps I missed it.
The reply to the open letter is what you'd expect and isn't reassuring. It makes a few errors.
Firstly, it's not looking forward. It states the EU today is not as nearly as bad as the USSR was at its worst. That's true and nobody argues that it is. However it's also not really relevant, because if you only start to object to a government at the point it's running gulags it's already far too late. To avoid a repeat of history, movement towards such a system must be detected and stopped early whilst it's still possible. That's why we need to look at the direction of travel and extrapolate.
Secondly, it's looking backward. It talks about how the UK was able to opt-out of the EU's worst ideas and talks about Thatcher. That was true in the past, but the EU has been getting more powerful over time and taking over more and more national responsibilities. The veto has been progressively weakened and now they want to abolish it entirely. Today's EU is not the same as the EU in Thatcher's day - it's significantly larger and much more hostile to "deserters", as Juncker has described the UK. And as the EU loves to keep telling the UK there is no more "cherry picking" anymore, i.e. opting out of their bad ideas. That era is over.
So what matters is what the EU will become, not what it is today or what it was 20 years ago.
And here is where the comparisons start to look bad.
Firstly and most importantly the EU does not recognise the democratic will of the people, whilst loudly proclaiming that it does. This is a major red flag. There is no effective way to control the Commission's agenda through voting.
It must be noted here that all communist regimes have Parliaments and they all have votes. In the USSR there was an elected body called the Supreme Soviet, whose members made the laws of the Union. The USSR was a dictatorship despite the existence of the Supreme Soviet because of a simple trick: all elected politicians had to belong to the same party, so there was no real competition of policies. It had the superficial appearance a democratic system without being one.
In the EU there are multiple parties and they do compete. The EU Parliament is neutered via a different means: the elected politicians can't control the executive or change the laws. This means they aren't really politicians and it's not really a Parliament, using standard dictionary definitions. It wouldn't matter if somehow a coalition of parties totally opposed to the Commission's agenda got elected: the Parliament lacks the "right of initiation". That also means there's no real point in having any party policies, so you see a wafer thin and artificial campaigns, where parties either have detailed manifestos that happen to align exactly with what the head of the Commission already wants, or you get protest parties that openly admit they can't change anything but say: elect us anyway just to 'send a message' (which is never received).
A good example of how unseriously the Parliament is taken is the way they were given a "vote" on the new head of the EU Commission, but the vote only had one option. MEPs could either support Ursula von der Leyen, or abstain. Votes with only one option are a classic symptom of communism; the sort of system that is happy to call itself a "People's Republic" but actually doesn't trust the people.
By the way, the EU does try to obfuscate a lot of this stuff by introducing mechanisms that theoretically are usable but in practice aren't. For instance there was briefly the Spitzenkandidaten system which meant the Parliament appointed the head of the Commission ... up until they appointed the wrong one, at which point that ability vanished. There's theoretically an EU Citizen's Initiative, but unlike Citizen's Initiatives in member states, this one can't be used to change the law or trigger a referendum. Actually they accomplish nothing even if you gather the required number of signatures (which is huge).
In the end the true nature is summed up by Jean-Claude Juncker: "There can be no democratic choice against the European treaties".
Another bad sign is the love of secrecy. In theory your countries national leader can influence the choice of Commission leader, except the decision of who gets the job is always made in secret and nobody knows who voted for whom or how the decision was made. This matters: the EU's own leaders have said in the past it's common for politicians to lie to their own voters about what they support. There is no public explanation how Ursula von der Leyen became head of the Commission. It could be fixed by making EU meetings be transparent but they refuse to do it. This pattern of secret meetings sans minutes crops up everywhere when you scratch the surface.
There are lots of other pieces of evidence the EU doesn't care about votes or democracy. For instance, in a democratic system you might have expected rejection by one of the biggest members to trigger at minimum some sort of reflection or debate. There hasn't been any - at the first meeting of the EU Council after the Brexit vote it wasn't discussed at all. The only topic on the agenda was creating an EU army - one that would report directly to the Commission.
Why does the EU need an army when there is already NATO? It doesn't, but totalitarian regimes do. Expect to hear more about this army's "peacekeeping" initiatives in future, albeit not for many years. The process of transforming into a Neo USSR is a slow one, fortunately.
The EU appears to implement rule of law, until the law gets in the way of the EU's aims and then it simply gets ignored. To quote Christine LaGarde on the Eurozone bailouts: "To save the Euro we broke all the rules. The treaties are quite clear. No bailouts."
Finally, loyalty to the EU strongly resembles the sort of loyalty to communism seen in the first half of the 20th century. Brexit has made this very clear by flushing it to the surface. Strongholds in academia, a belief in the superiority of 'expert' run government over democratic decisions, constant double-speak like a "People's Vote" (of the sort held in a People's Republic), a willingness to do whatever it takes to gain victory. Orwell had a lot to say on these topics.
I could go on but you get the picture. The EU looks superficially democratic and law-based, but blocks actual democracy at every turn and the law is enforced politically. It's a deep seated set of attitudes that can't be reformed. It will inexorably continue on its present path, with the EU getting steadily more powerful until it totally controls the member states, helped by large numbers of quasi-religious loyalists who will crack down and imprison anti-EU protesters under the guise of "hate speech".
The Euro set limits on how much countries were allowed to borrow and how high their deficits can be.
The only massive flaw it has is the believe that countries could be simply trusted to stick to these rules.
This happened during the Euro crisis some years ago, and at the time it seemed that Germans with any kind of savings were desperately looking for safe places to put it. Lacking much in the way of financial literacy, many undoubtedly fell victim to professional crooks.
It's hardly any surprise that property markets across Germany started heating up around that time. Property is widely viewed as a safe bet. They call it 'Betongold' or 'concrete gold' for a reason. I know that isn't the only factor behind the vast increase in property values in many areas, but it's undoubtedly a major one, and I think we can expect this situation with interest rates to further inflate what is beginning to look like a bubble.
Nominal property values in the mid-sized city where I live have more than doubled in a decade--seems like a wild party after decades of relatively flat (real) property values.
It's something of a shock, given that earnings have hardly budged during the same period. One could argue that Germany was abnormally cheap 10 years ago in terms of both consumer goods and real estate, and it might be true, but the reality on the ground is pretty disheartening, particularly in light of political developments in places such as Saxony. I'm afraid the squeeze on people in the middle is going to fuel more political instability, or could at the very least be used to stir up trouble.
What do you mean by that?
The incentive is just the same either way. So if they move it from say savings to some investment... not sure that requires huge experience. Most american's aren't savvy investors.
There are other retirement savings vehicles, but they're pretty much all annuities. Most Germans, including well-earning engineers like my husband, can't imagine receiving post-retirement income in anything other than a monthly pension; perhaps rent on apartments or houses they've managed to buy along the way. Remember that less than half of German adults live in home they own; renting the same apartment for 40 years is not unusual here.
Germans tend to be more skeptical about the stock market than Americans are. To balance this, they are also far more hesitant to borrow for consumption - my husband's family were slightly horrified that I'd financed the full cost of my car, on top of owing student loans. I didn't mention the credit card debt it took me a couple of years to finish off!
(Me: American who grew up watching my parents always make their payments, but pretty much always have a car loan and who took out some of the student loans I paid back because they absolutely had no discretionary savings.
Husband: German who grew up watching his parents buy 3-5 year old cars with bank drafts once their old one started spending too much time at the shop, and then gave him a bunch of their savings as a university graduation present that sat in his bank account until we bought our house 15 years later)
But what if I (German resident US citizen) leave the country before I sell the fund? They would have to refund all they had taxed; otherwise how do you reconcile that with tax in a new country of residence?
https://www.howtogermany.com/pages/germantaxesforinvestment....
Perhaps everyone will consider working less when your excess fiat has so little value.
Dig it down ... atleast I would.
If you don’t trust that sort of stuff then the gold standard is totally irrelevant anyway.
If it is true, I wonder if similar laws exist in other countries.
How else would interest rates be set? If you want your money to grow all by itself just because you deposited in an account with an interest rate, how does that interest rate get decided if not by someone in an office? Someone, in an office, whatever tools they use to decide, has to make that decision, surely.
This is a good way to blow up a bank.
It is, and it’s difficult. Perhaps fundamentally impossible, given it would have to predict consumers’ tastes and preferences to estimate B2C companies’ creditworthiness.
Rates are negotiated instruments, a combination of the return on safe assets today, the risk of that rate changing tomorrow, and the credit profile and availability of borrowers. There is no known algorithm which can robustly balance these variables. If it were discovered, it would be worth billions, perhaps more, and fundamentally change finance. Pretty much every crisis has a story about smart people thinking they’ve solved this problem in some narrow niche of the economy and then being shown disastrously wrong.
It can't be done by one individual for the whole market, but the invisible hand does a pretty good job. The principle of a market as a whole establishing prices, rates, etc. is widely accepted.
The only way banks could pay a higher interest rate would be to bear more risk, but that's how you get a banking crisis.
Lots of interest rates are influenced by markets, where lenders and borrowers base their activity on available rates (if no one borrows at a given rate, a lender may seek business by reducing the rate...).
Also the TIBOR and LIBOR and all the other *IBORs aren’t set by the government either. Certainly government monetary policies affect these rates, but ultimately it’s a free market function.
Having the government directly set private lending rates is a very bad idea and would certainly result in disaster (much like how all other price controls are terrible ideas).
Under normal conditions, they have an extremely strong influence on medium term interest rates as well by convincing the market that they will keep short rates high(low) in the future, while will then raise(lower) medium terms rates.
If that proves inadequate, like it did after the crisis, the Fed can buy and sell bonds directly to move medium to long-term interest rates.
The Fed may have a historical preference for relying on the first mechanism alone, but through some combination of these techniques, they can set any interest rate to any reasonable value almost at will.
By a free market, the same way it was set for a very long time. It gets decided by how many people borrow at a given rate, which will typically raise or lower the rate. Some one will make small adjustments around the broader market rate; if enough people make those small adjustments in one direction, the range moves.