Hoping to kick-start European economies, the European Central Bank
took the extraordinary step two years ago of lowering one of its key
interest rates to below zero. The idea was to discourage banks from
stashing their money in the central bank by charging them a modest rate
for doing so. Since the banks would lose money rather than earn interest
on their deposits, it was hoped they would be prompted instead to make
more loans at lower rates to businesses and consumers.
It
hasn’t worked very well. As many experts predicted at the time, the
policy has had only a modest impact on growth. It is also increasingly
clear that pushing rates down further wouldn’t help much and could, in
fact, increase risks to the global financial system.
The European Central Bank, or E.C.B., sets monetary policy for the 19 countries that use the euro. In June 2014
it became the world’s first major central bank to adopt so-called
negative interest rates. Monetary officials in Denmark, Switzerland and
Sweden adopted similar policies in the following months; the Bank of Japan joined them in January.
Negative
rates have helped to push down the cost of borrowing, but that has not
provided a big lift to the euro area. The E.C.B. expects growth of 1.6 percent
this year, about the same as last year. This is not surprising, because
lower rates don’t address the real economic problems of many European
countries: weak consumer demand and weak business investment. Companies
are less likely to borrow for new investments when demand for their
goods and services is not increasing — even if the cost of borrowing is
cheaper than ever.
Of
course, growth might have been even lower without negative interest
rates. But there are limits to the benefits of such unconventional
monetary policies. It would be far better if European governments used
fiscal policy to increase demand by investing in roads, bridges,
railroads, ports and other infrastructure. Government spending would
create jobs and stimulate economic activity, and would not cost much.
Bond investors are willing to lend money to the German government for 30 years at a rate of just 0.38 percent; in France, the rate is only 0.878 percent.
Meanwhile,
continuing to rely on negative rates could be dangerous. The worry
among many experts is that banks, institutional investors and even
individuals desperate for higher returns might be seduced into taking
foolish risks. They might also be tempted to make big investments
overseas, driving up the price of stocks and bonds in the United States
and Asia and creating bubbles that expose the global financial system
and economy to another crisis. Some analysts are already worried about
high prices for real estate, stocks and other assets.
In addition, persistently negative rates could well force European banks to raise fees on checking and savings accounts
to recoup the rising cost of depositing reserves at the central bank.
This, in turn, would encourage individuals and businesses to take some
of their money out of banks and stash it in safes, or under mattresses.
And that would not be good for the stability of European banks.
Mario Draghi, the president of the E.C.B., clearly understands the risks of negative interests rates, which is probably why he did not lower rates
further last month. But there is only so much he can do. The political
leaders of Europe need to help him revive Europe’s economy.
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