Silent assassins chase German savers

Published in Business Spectator (Melbourne), 21 November 2013

Life is frustrating for German savers. If they had 5,000 euros to invest and wanted to keep them in an instant access savings account, Deutsche Bank currently offers them an interest rate of 0.15 per cent, the Cologne Savings Bank 0.20 per cent and Postbank a whopping 0.7 percent. This is certainly not much, but it is only the yield before income tax. After tax, there is hardly any return left to speak of.

Inflation in Germany may seem low but it is still higher than the interest rates available to savers. In October CPI stood at 1.2 per cent, which was slightly below this year’s peak of 1.9 percent, recorded in July. Over the course of the year, price increases are likely to average around 1.5 per cent.

Put differently, Germany’s savers are already losing about one percent of the real value of their capital per year by keeping it in the savings accounts of the country’s mainstream financial institutions. It is like a silent tax on wealth. It is a tax that nobody has ever voted for, that no parliament has passed, and that does not appear on any tax bill. But it is a real economic burden on anyone with cash to spare.

And it is a tax that is part of Germany’s contribution towards saving the euro.

If you want to understand Germany’s hostility towards the European Central Bank’s ever-more aggressive monetary policy, you need to see the situation through the eyes of German savers and taxpayers. For them, the euro crisis of the past few years has been an unmitigated disaster.

As taxpayers, the Germans were forced to underwrite enormous guarantees for individual countries and rescue funds such as the EFSF and the ESM. Implicitly, they are also backing the ECB’s Target2 credit scheme towards eurozone periphery economies. As savers, they are also paying for the crisis through minimal returns on investments. This does not only affect savings accounts but life insurance policies and pension funds as well.

After ECB president Mario Draghi lowered its main interest rate to 0.25 per cent, and with the prospect of further monetary easing on the horizon, German savers are becoming increasingly exasperated. Their money may be reasonably safe with their country’s financial institutions.

However, the return on keeping money with them is only marginally better than putting it into a piggy bank or stashing it under the mattress. In real terms, savers are losing out and it is likely to get worse in the future.

In a way, the Germans are battling first-world problems. Their plight is comparatively modest compared to, say, the Greeks or the Portuguese. The crisis countries have to shoulder high rates of unemployment, falling wages and pensions, and severe reductions in their living standards. It is a massive adjustment that these countries are going through, which is insufficiently described as ‘internal devaluation’.

Internal devaluation in the eurozone periphery means that competitiveness is meant to be regained through lowering costs and prices. The past few years have demonstrated what a painful process this is. The Latin euro economies and the ECB are now making it clear that they are no longer willing to shoulder the burden of adjustment alone. They want the euro core to accept a greater burden as well. This means that financial repression is likely to get worse for Germany.

Ultimately, what the ECB’s move towards greater monetary activism comes down to is a recalibration for sharing the costs of the euro crisis. Previously it was the periphery that was paying the highest price through internal devaluation. In the future it might be the euro core that bears a greater share of the costs through financial repression.

Both options are two sides of the same coin. One of the main reasons of the euro crisis has always been the diverging competitiveness between eurozone economies. After the introduction of Europe’s common currency, the German-led core lowered its unit labour costs while the other members of the currency union became more expensive.

To restore a balance between eurozone economies now, there are only two options: Either Germany becomes more expensive (i.e. higher inflation in Germany), or the others become cheaper (continued internal devaluation in the periphery). Or indeed a dose of both measures in combination.

What this means in practice now dawns on German savers. If they had previously believed the past years with their minuscule returns were bad, they are in for a rude surprise. The coming years will get even worse.

The ECB is determined not to allow eurozone-wide deflation. This means that higher inflation rates in Germany will be tolerated, if not desired. This will ease the pain in the periphery, and inflict even greater pain for German savers. No wonder the Bundesbank is openly resisting a further loosening of monetary policy.

It is the tragedy of monetary union that it has pitted whole countries, their economies and their peoples against each other. What should have been a win-win situation has become a zero sum game. The periphery cannot win if Germany does not lose out and vice versa. How on earth the creators of the euro imagined it could ever be otherwise given the diversity of Europe’s economies will forever remain their secret.

As this recalibration of monetary policy plays out in Europe, those frustrated German savers have few options left. They could decide to invest in real estate even though the German property market has traditionally been a capital-destroying machine. They could also try their luck in the stock market, although with the DAX above the 9,000 point level it does not look like a bargain.

Or given the minuscule returns on their savings, they could instead decide to go on a spending spree, storm the department stores and enjoy their lives as consumers. It is certainly an option that would appeal to those international critics of Germany’s trade surplus. However, this may not be the most desirable outcome in an ageing country that should be saving for retirement. But at least it would be more fun than watching your savings slowly disappear like ice in the sunshine.

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