No further ECB rate cuts

Dhe financial markets firmly assume that the European Central Bank will further reduce the already negative deposit rates due to concerns about the economic consequences of the corona virus. This expectation can be derived from the forward rates for short-term interest rates. Such a step would be counterproductive, it would in no way strengthen the economy in the euro area, but rather dampen it through negative side effects.

The mechanisms by which negative interest rates affect the economy are by no means clear and reliable. First of all, negative deposit rates put a further considerable strain on European banks, which are being increasingly beaten off in the competition with US companies. Graduated allowances for punitive interest can alleviate the burden, but not prevent it.

This is one of the reasons why central banks’ hope that punitive interest rates will cause banks to lend more loans on more favorable terms will hardly materialize. Possible bottlenecks for lending lie neither in the interest rate level nor in the lack of liquidity, but if so, then in the area of ​​risk-bearing capacity and capital resources. If there were no negative deposit rates, the capital base of the banks could have been significantly improved in recent years.

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Negative interest rates also do not have the hoped-for positive effects on consumer demand from private households. The saving rate has largely remained stable on average in the euro countries in recent years, and has risen significantly in Germany. The willingness to consume is by no means very high; Private households are uncertain about the future returns on their savings and the opportunities to actually achieve their savings goals. This causes many to save more and spend more carefully. It is therefore by no means clear that the development of income and production was strengthened by the negative interest rates. The opposite could be the case.

Tax deferral and short-time allowance effective tools

Smaller economies, such as Switzerland, can use negative interest rates to combat excessive currency appreciation. However, this cannot be a motive for the European Central Bank, because firstly, the euro is already relatively weakly valued, and secondly, the central bank denies pursuing an exchange rate policy that is intended to bring the national economy competitive price advantages over others.

For all these reasons, further easing efforts by the European Central Bank will not achieve the goal of neutralizing the foreseeable economic slowdown caused by the corona virus. Action is required to support companies that can face temporary but existential liquidity problems through liquidity support, tax deferrals, effective instruments such as short-time work benefits and similar measures.

In order to stimulate consumer demand, tax and duty relief would be necessary. The withdrawal of the special state burden from the solos in Germany is absolutely overdue. They should be carried out as quickly as possible and, of course, also exempt corporate income from solos, which are primarily put under pressure by the corona virus. The infrastructure programs planned in Germany are all well and good, but they will not be able to do anything about the short-term economic downturn caused by the consequences of the corona virus. Rapid measures are required, also to stabilize the trust of consumers and companies as much as possible.

The author was chief economist at Allianz and is now a consultant.

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