The President of the European Central Bank, Mario Draghi, says that lowering interest rates will entice investors and has blamed Germany for creating a global excess of savings. He also stated that Germany’s excess of savings has reduced the flow of investment into the European economy. This statement came after Germany denounced the Bank’s rate policy.
London, England, May 31, 2016 — The ECB has decided to reduce its benchmark refinancing rate to zero. This move has drawn criticism from many German bankers, journalists and politicians who stand in opposition to the move.
Germany has been in a state of constant conflict with the European Central Bank for some time now. According to German sentiment, the ECB is supporting and encouraging euro-skepticism. Moreover, according to a mainstream German newspaper, the ECB has managed to create a situation of “social disaster”.
While criticizing Germany, Mr Draghi also said that the current interest rates were harmful as they exert undue pressure on big businesses, financial companies and pensioners’ income. Mr Draghi went on to say that the real problem was not the interest rates, but a global excess of savings and an unwillingness to invest.
Richard Sharpe, of Acom Tokyo Securities says, “To be able to get rid of a disease completely, it is important to eradicate it from its very core. Fighting the symptoms will bring only a short-term relief. To deal with it in the long-term, it is important to strike at its very root. Germany’s ageing population has been vying to increase savings. At the same time, since productivity has fallen, German entrepreneurs are reluctant to borrow money at higher interest rates. The only way to deal with this problem is to increase the interest rate. This is the only way Germany will see an increase in demand for capital.”
Mr Draghi also called out Germany for maintaining a surplus over 5 percent for over ten years. Bringing perspective to the debate around a single currency, Mr Draghi said that the currency has maintained a 3 percent surplus everywhere else.
However, if interest rates are reduced then maintaining such a high surplus will become quite difficult. The world is already suffering from low real returns and the demand for capital has decreased significantly. In such a scenario there is no country in the world that is capable of absorbing excess savings without causing the returns to decline further.
Mr. Draghi concluded that, in this scenario and with the current world economic climate, reducing central bank’s interest rate is actually a good idea, as it will promote investment. If the ECB refrained from reducing interest rates, investors would lose interest in the European economy and this could prove to have dire consequences. Lowering interest rates is one of the only feasible ways by which the economy can be pulled out of a recession.
Acom Tokyo Securities Ltd