Things are not going well for the German centre-left. Having ruled out cooperation with the Left Party, the SPD and Greens have little chance of toppling “Teflon Merkel”. The numbers, fairly stable at around 27% for the SPD and 13% for the Greens compared with 40% for Merkel’s Conservatives and 5% for their liberal allies, just don’t add up. There are a number of reasons but, as I have suggested before, perhaps the most important one is that the SPD has failed to exploit Merkel’s failure to resolve the euro crisis and to articulate, from the outset, a clear alternative narrative, thus establishing a reputation for economic policy competence.
This situation changed today – unfortunately for the worse. Various media report Peer Steinbrück, the SPD’s Chancellor candidate, sharply criticising the ECB in a Reuters interview for – wait for it! – keeping interest rates excessively low and thus expropriating German savers. This policy put savers in an “unspeakable situation”. Consequently Steinbrück is “very skeptical about Mario Draghi’s move to announce such a low interest rate policy – almost a policy of zero interest rates – for the ECB for the coming years”.
There are three possible interpretations. Either the SPD candidate is so desperate for votes that he will say whatever it takes in order to mobilise core voters. Or he has literally not the first grasp of macroeconomics. The third possibility is that both these statements are true, and this, I fear, is the most likely.
There is really no dispute at all amongst economists that it is the job of a central bank in a crisis to bring about negative real interest rates – policy rates that are below the inflation rate. This stimulates output and reduces unemployment, helping to overcome the crisis. There is no doubt that the euro area remains in a deep crisis. Thus there can be no doubt that, in principle, the ECB is acting correctly. What is, admittedly, historically somewhat unusual, is the promise to maintain low rates into the future (“forward guidance”). Normally central banks do not do this. But does someone who wants to become German Chancellor need telling that these are not normal times? That interest rates are already close to zero? That inflation is historically low? And so one of the few ways to gain traction in terms of economic stimulus is to promise to maintain the loose policy stance going forward. (In fact one can debate just how much this ECB promise is worth, but that is another issue.)
There’s another, more fundamental way to look at this using two economic concepts that, once again, I would expect a political leader to be familiar with: supply and demand. At the moment, investment (including housebuilding) is depressed across Europe. That means that the demand for capital is low. People are nervous about the future, they are saving more (or paying down debt). The supply of capital is high. What happens when demand is low and supply high? The price falls. What is the price of capital? The interest rate. So the fact that Peer Steinbrück’s savers are suffering from low, even negative real returns, is in essence a normal market reaction that, ultimately, does not have so much to do with Mr. Draghi.
Let me put it even more bluntly. The miserable return for savers reflects the fact that there is not enough borrowing going on. The best thing that Peer Steinbrück could do to comfort the poor German savers is to tell them that a SPD-led government would borrow some of that excess, cheap capital and invest it in expanding Germany’s productive capacity, raising productivity and employment, helping prepare the country for future challenges, and assisting with rebalancing the euro area on the way. But that requires a Chancellor candidate who is able to explain these – actually quite simple – macroeconomic linkages to ordinary voters. Sadly, Peer Steinbrück does not seem up to that task. More fundamentally, of course, by signing up to the constitutional debt brake the SPD has painted itself into a corner. The necessary shift in policies – borrow to invest – is tightly constrained by that ill-judged constitutional requirement, unfortunately put in place by a centre left party that desparately wants to establish a reputation for economic competence, but which often fails to do so because too often it panders to discredited neoliberal theories and popular prejudices.
On that rather depressing note, and talking of “brakes”, this blog is heading off for its summer break. More analysis and bad puns in September.