Interest rates for European bonds have breached the lower zero bound again as a result of uncertainty about the economic outlook. The reason why we are facing this problem again is because its underlying cause has never been dealt with properly, says Mary Pierse-Bloem, Professor of Financial Markets at Erasmus School of Economics and Global Head Fixed Income in the Global Investment Center of the Private Bank of ABN AMRO. I compare it to a patient who goes to the doctor with heart problems, but who - while receiving treatment - continues with smoking and drinking alcohol. The European Central Bank acts like a doctor who continues to administer oxygen to the patient. However, to really recover, the patient much change his or her lifestyle. For the Eurozone, this means that we need a 'healthy' banking sector and structural reforms which could foster economic growth, says Professor Mary Pierse-Bloem.
Who borrows money, gets money. At least, if you are a German or Dutch government. Investors are namely looking for safety because of the ongoing concerns about the economy, Brexit and trade war. As a result, the interest rates on government bonds - which are perceived as safe - are falling again. Pension funds and people who try to save money are unhappy with these low interest rates, but for the government it is a blessing: it saves them billions of euros.
The favorite scapegoat of such low interest rates are central banks. To stimulate the economy, they lowered the interest rate to 0% and bought government bonds for billions of euros. As a result, the financial sector was fed with ' cheap money'. This money could be used to provide loans, which stimulates real economic growth. However, even without the unconventional policy of the European Central Bank and in the US the Federal Reserve, interest rates would have been low at this point. The interest rates is actually already decreasing since the 1970s, so it is not a new phenomenon. It all has to do with the decrease of inflation and lower economic growth. Structural factors have led to this. Production has been moved to where it is cheapest to produce goods as a result of globalization. This leads to lower inflation rates. Furthermore, as a result of robotisation and technological development, companies need less personnel, which leads to a reduction of costs and thus lower prices as well. An ageing population also contributes to the fall of interest rates.
Central banks thus do not control inflation rates. Nevertheless, they did try to boost inflation, although their attempt was unsuccessful. In Europe, banks did not yet cleaned up their balance sheets. As a result, banks, especially in Italy, still have many 'bad loans' on their balance, and this prevents the policy of the ECB from being effective. This is because the money that it has provided to the financial sector is stuck there.
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Read the entire article (in Dutch) at de Telegraaf, 23 February 2019