Germany has been more critical than any other country of the European Central Bank’s long-standing policy of ultra-low interest rates. But no country has benefited more from ECB President Mario Draghi’s controversial strategy.
Since the financial crisis began in 2008, low interest rates have saved the German government a boatload of cash. Interest payments on debt have consistently come in below the government's own projections. Rather than paying €450.4 billion in interest between 2008 and 2017, as its annual budgets had forecast, new finance ministry figures reveal that Germany paid just €288 billion. That amounts to savings of €162 billion – equivalent to half the entire annual federal budget. The figure was cited by the finance ministry in a written parliamentary answer, seen by Handelsblatt.
Economists say German public authorities at all levels have done very well thanks to a decade of ECB crisis management. “The federal government, the states, and local authorities are all big winners," said Marcel Fratzscher, president of the economic research institute DIW Berlin. "Without the ECB zero-interest rate policy, Germany could never have balanced its budget in recent years.”
The 19 euro-zone countries have collectively saved €1.15 trillion in interest payments since 2008.
Incoming Finance Minister Olaf Scholz is also a direct beneficiary of the savings. The new coalition government plans to boost public spending by €46 billion over its four-year term. And because the German government has extended the maturity of its debt over the last decade, Mr. Scholz can expect to reap the rewards of the ECB's policy for many more years – even as short-term interest rates begin to rise again.
Other European countries have also benefited from the ECB’s monetary policy. Across the euro zone as a whole, Mr. Draghi's actions have dramatically eased fiscal pressures, with governments helped by an unusual synchrony of low interest rates and strong economic growth. 2018 will be the first year since the euro's founding in which all members states will report deficits below 3 percent of GDP, meeting the so-called Maastricht criteria for annual spending.
Information from the Bundesbank, Germany’s own central bank, suggests that the 19 euro-zone countries have collectively saved €1.15 trillion in interest payments since 2008 when compared to where interest rates were before the crisis. Of these, France avoided €275 billion in payments, while Italy saved €216 billion. Going by that pre-crisis metric – rather than the finance ministry calculations above, which include periodically revised projections over the 10-year period – Germany has saved even more (see graphic below).
Germany’s 16 federal states and hundreds of local authorities have also benefitted from Mr. Draghi’s policy. In 2007, the federal states collectively owed €500 billion. While that figure has risen to €620 billion today, the total interest charges on the debt are half what they were a decade ago. In the last 10 years, the federal states have paid a total of €83.7 billion in interest, while local authorities forked out €18.9 billion: big numbers, but far smaller than they could have been.
With the ECB set to gradually increase interest rates after years at rock bottom, the question is how much Germany’s public budgets will be squeezed as rates rise. Experts say local authorities are likely to be worst hit: they rely more on short-term financing and will probably feel the impact of higher rates almost immediately.
Mr. Fratzscher said rising rates’ impact on euro zone economies will largely depend on investment patterns during the long zero percent years: “Governments should use low rates to secure competitiveness. They need to make smart investments in education, infrastructure and innovation.” He said that Germany’s government could have used surpluses to better strengthen precisely these areas.
Some European countries could be badly burned in a more hostile economic environment. The situation in Spain and Portugal is thought to be particularly fragile: a fall-off in growth could see deficits skyrocket once more. However, in one respect, the debt situation is better than 10 years ago. Many euro-zone governments have converted much of their sovereign debt to long-term, low-interest bonds, meaning any increase in rates could take years to filter through to government cost pressures.
Clemens Fuest, president of the Ifo Institute for Economic Research says this could make it easier for Mr. Draghi to slowly ratchet up rates over the next year, as planned: “That means less pressure on the ECB to keep rates low, although the pressure does still remain,” he told Handelsblatt.
Martin Greive is a correspondent for Handelsblatt based in Berlin. Jan Hildebrand leads financial policy coverage from Berlin and is deputy managing editor of Handelsblatt's Berlin office. To contact the authors: [email protected], [email protected]