ECB policy has unintended consequences
Switzerland issued bonds with negative interest rates which were heavily subscribed. It means the bondholder earns no interest but pays interest on the purchase. This is perverted and punishes savers, writes Prince Michael of Liechtenstein.
Saving is renouncing consumption in favour of investing in the economy in the expectation of a future reward. Saving is essential for a healthy economy and most is invested in pension funds.
Punishing savers has so far been a privilege of the tax systems and/or inflation. Inflation is a disguised tax on savings.
Now the monetary system is punishing savers although it should reward them.
The Swiss National Bank introduced negative interest rates to contain the excessive rise of the Swiss Franc. The rise was the result of a loss of trust in the euro caused by the European Central Bank’s quantitative easing programme and a policy of nearly zero interest rates.
Denmark had a similar problem to Switzerland and was also forced to introduce negative rates to avoid its currency rising excessively.
The Swiss Confederation can now borrow money and investors are ready to pay for the privilege of safeguarding part of the value of the Swiss economy. This is a huge sign of trust in the Swiss but not for the eurozone.
In Denmark, there were even instances where banks lent money to solvent clients and paid them interest to avoid higher negative interest rates in the interbanking system or with the Danish Central Bank. It meant you could borrow and receive interest.
These were the consequences outside the eurozone. But what happens in euroland? The results could be considerably worse and the goal to enhance growth through abundant money will be missed.
The Greek government is said to have plundered its citizens’ pension funds to meet its debts. The pension funds have been forced to subscribe to worthless government bonds. The ECB plunders eurozone pension funds and other savings in a less obvious and more sophisticated way with a combination of zero interest rates and by creating inflation.
The money plundered from savers in the eurozone, as in the case of Greece, is used to buy government debt from countries in trouble. The result is that the purchasing power of retired people will be reduced.
Countries in debt have achieved that through populist and highly excessive government spending. Europe could add poverty among the elderly to its grim achievement of high youth unemployment.
The ECB's quantitative easing and zero interest policy has other unintended and negative consequences. Plenty of cheap money leads to less risk aversion in investment and creates bubbles. The present rise in equity markets is one indication. Property markets are a concern once more.
Money which has no price risks being misallocated in the economy.
The 18-month quantitative easing programme, involving more than a trillion euros of buying debt from public institutions, is unlikely to enhance Europe’s economy and business. But it runs the danger of easing the pressure on governments to introduce reforms, some of which will be unpopular with voters. But it is only reforms which will bring Europe's economy back on track.
Europe is in danger of continuing its economic downward trend and losing its global competitiveness.