ZLB and German Socialdemocracy

It may look like a long stretch to make any connection between the interest rate policy of the ECB and the German Social Democratic Party. Let me start from two developments. First, the ECB has joined some other central banks and introduced features of negative interest rates to its policy menu. Second, representatives polls and the most recent results of regional elections in Germany indicate that the once powerful Social Democratic Party (SPD) is lingering around the 20%-marge, and only about six percentage points above the polling data for the right-wing Alternative für Deutschland. (AfD).

German Finance Minister Schäuble, a market-radical lawyer-turned finance expert, recently came up with the splendid idea to explain the rise of the AfD with the interest rate policy of ECB (‘Mario Draghi’, in the words of Schäuble, adding his hit-the-Italians-flavour to the statement) that would radicalize the famous German savers who lose out from this policy. The damaged German savers would then use the valve of the AdF to express their frustration. It needed the President of the German Bundesbank, Jens Weidmann, to explain to his Finance Minister via the Financial Times that German households are also employees and often debtors, and in this role do benefit from negative real interest rates. It is easy to state that Schäuble not only fails as macroeconomist but also as political scientist. And yet, his views are widely shared.

And here comes the SPD into the game. The party is part of the coalition government and holds via Sigmar Gabriel also the position of the Vice-Chancellor. This sounds like an excellent political position to influence actual politics. To be clear: The ECB is a independent institution, and independence of a central bank belongs to the highest political goods in Post-War Germany. This should not prevent the SPD, though, to ask why the ECB is doing what she is doing.

Two straightforward answers come up. First, Germany is heading from one current account surplus to the next, and this means nothing else then that savings are massively outcompeting domestic absorption. So far, Germany benefits from the extremely asymmetric procedures of the Macroeconomic Imbalance Procedure of the EU and is not punished by fees for the extraordinary surpluses. It needs not a lot of social accounting insight to see that the macroeconomic savings glut in Germany generates a strong downward push on interest rates, and the ECB is more a follower then a leader in this process. Second, the ECB policy is reflecting a European version of the secular stagnation-hypothesis, namely a structural weakness in effective demand that has its core in the still working austerity approach, covered in the German case as ‘Black Zero’.

And here I can close the circle. The SPD would have a excellent opportunity to benefit from the misreading and more so from the weakly hidden ideological project of the German Conservatives to become the European High Priest of Balanced Budgets by explaining to the German political audience the connections between a misguided fiscal policy and the monetary policy of the ECB. It is clear, that the ECB is not the driver for negative interest rates. It is national fiscal policy by governments that deliberately make no use of the existing fiscal space, and thus urge the central bank to save the day by executing non-orthodox policies. Unfortunately, the SPD is not making such a case. Suicidal tendency?