Negative interest rates. Free money policy. These are terms that have been on the front pages lately. The warning 'that borrowing money costs money' in advertisements for loans now only applies to agricultural companies, SMEs and households. Large companies and governments either pay nothing to borrow money or are often even given money to do so.
Roughly half of the bonds of companies with a high credit rating in the eurozone have negative interest rates. This share is even larger among governments. In Germany and the Netherlands, the interest on loans with any term, i.e. up to 30 years, is negative.
Of the 19 euro countries, only Greece, Latvia and Lithuania have interest rates on bonds of all maturities higher than 0%. In Switzerland, the island in the eurozone sea, the ten-year government interest rate is even -1,1%. And then it concerns nominal interest rates. In real terms, that is, if we take out inflation, it is now easier to find someone who can lick his/her elbow than to find a bond from a creditworthy issuer with a positive real interest rate.
Otherworldly messages
For households and entrepreneurs in the Netherlands, these messages about free money and negative interest rates are unworldly messages. (Not in Denmark, by the way, where you can take out a mortgage loan with a negative interest rate). When an entrepreneur in the polder applies for a loan from his bank, upon approval there is often a 2 before the decimal point in the interest payment, if not a higher figure. A private individual who takes out a personal loan even pays at least 3,9% or more. That is if he has his own house and a permanent contract. Someone with a rental property and a temporary contract pays even more.
It should be noted that the concept of virtually 0% interest is not unknown to entrepreneurs and households. It is already a fact in their savings account. There is also a good chance that savings interest rates will soon fall below 0%. Besides the fact that this is all bizarre and absurd (since time immemorial the rule has been that whoever borrows money pays interest on it and does not receive it), the above historical anomaly can have negative economic effects.
Spend or save
Economic growth is largely driven by household consumption. That consumption can come from income or because households borrow money to spend. You can spend or save every euro you earn. In other words: every euro saved is a euro not spent. Granted, in theory, if I save, the money will eventually end up going through my bank to someone who wants to spend it. Nowadays that kite flies much less than before.
On the one hand because many people are keeping more and more savings at home and on the other hand because banks cannot sell it all to other households or companies. Large companies are increasingly financing themselves on the capital market, where they can borrow for free. Smaller companies either do not receive a loan or refuse to do so because the interest rate is too high, due to the risk assessed by the bank.
Supply of savings exceeds supply
Many households in the West have very high debts and are more concerned with paying off old debts than taking on new ones. Speaking like an economist, the supply of savings exceeds the demand for it. The ancient economic law, that of supply and demand, then says that the price will go down. The price of savings is the savings interest.
And then there is the fear among some households about the future. They see the central banks taking even more absurd measures, which may lead them to believe that economic disaster is coming their way. The Pavlovian response is then to save more. That in turn could worsen the economic outlook, because more saving means less consumption.
Worse growth prospects mean, among other things, that banks will increase the risk premium that they charge for the interest on business loans. Logical, because with poorer growth prospects, the chance that a loan turns out to be uncollectible increases. Something that causes companies to invest less, employment suffers, households to think 'see, disaster is indeed coming our way', and so on.
Gloomy ECB actions
Viewed this way, it may well be that a recession is on the way. Not despite new interest rate cuts from the European Central Bank and other measures that make monetary policy even looser, but because of that policy. Many households that are not currently concerned about the future - and rightly so, given economic growth, unemployment and wage increases - may actually become gloomy because of the ECB's actions.
The following shows that the bank actually no longer knows what it is doing. One of the things that will soon come out of the ECB are measures that should compensate for the negative side effects of 0% or negative interest rates on bank profitability. Every measure has negative side effects that will undoubtedly also emerge from this compensation. Something for which the ECB will undoubtedly take new compensatory measures and so on.
Announce stimulus package
An ECB director recently said that the bank should announce a significant stimulus package in September. If it threatens a deep recession, then there is something to be said for that. But stating that is a few bridges too far. No, what the ECB wants to do can best be compared to fire trucks that drive up to your house and start spraying your house mercilessly, out of fear that your house might catch on fire in a year or so. The water damage this causes is then downplayed.
In conclusion: stop monetary madness in the Eurozone. For the sake of economic growth in the short, medium and long term. Doing nothing is also an option, sometimes even the best option.