E.U. BATTLES When Political Catchphrases Lie

The way the European Central Bank is criticized in Germany is dangerous, and serves only to alienate Germans from the European Union.
The ECB: standing guard against verbal attacks.

Given the complaints and lies that have been swirling about the European Union over the past 25 years, it’s hardly surprising that Great Britain will soon vote on whether or not to exit the bloc.

Germany has its own particular relationship to the European Union but that does not make it free of UK-esque gripes about the euro and its institutions.

The European Central Bank’s loose monetary policies do deserve criticism. But the way the central bank is talked and written about in Germany is dangerous. People now feel alientated, similar to the relationship between the British and the European Union, which soured in the 1990s.

Wasn’t it Otmar Issing — a German who formerly was chief economist at the European Central Bank — who recommended the current inflation goal?

Partly to blame is the verbal trickery that critics employ. Take the German term "Strafzins", meaning “penalty interest,” which is commonly used in Germany as the semi-official description for a negative interest rate.

But, in reality, negative interest is not “penalty interest.” Nor is an income tax a “penalty tax.” And the news media is not the “lying media” as it has been called - even if newspapers and TV don’t always tell the truth.

In the German language, it is possible to combine two nouns into a new one and thereby build an emotionally charged buzzword or phrase.

These sorts of expressions often take on lives of their own, as is currently the case with “penalty interest.” But these need to be handled with caution. In English or French, for instance, it wouldn’t be possible to subtly slander a central bank with a single word.

The problem with “penalty interest” goes beyond words. Its users obscure the essential difference between a real and a nominal rate of interest.

I assume that journalists and, of course, economists are familiar with the difference but choose not to mention it. Labor union representatives make the distinction. They seek wage increases above the rate of inflation, because they want to increase their members’ buying power.

It is similar with rates of interest: When inflation and interest are both at 2 percent, then real interest is zero. And it is still zero, when inflation and interest are at minus 0.2 percent. Nothing changes for the saver. The buying power of money is preserved in both cases. And since savings interest rates do not as a rule fall below zero, the real rate of interest for savers even remains positive.

There are arguments about the advantages and disadvantages of negative interest with regard to the money that banks park at the European Central Bank. I have my own doubts. The interest reduces the profit margins of banks. That is partly compensated for by generous injections of liquidity. Banks can soon engage in refinancing with negative interest and thereby boost their margins.

There is also room for discussion on the marginal utility of ECB bond buying. But this is a technical debate. It does not lead to expropriation, as is often claimed in Germany.

The real issue is how to credibly attain an inflation goal of just under 2 percent, after it has not been reached in the last three years.

On this point as well, the German debate is ridden with hypocrisy.

Wasn’t it Otmar Issing — a German who formerly was chief economist at the European Central Bank — who recommended the current inflation goal? Isn’t it logically possible to miss a goal in both directions and be compelled to act?

Germany’s economists also miscalculated here. A central banker once assured me that labor unions would make sure there is no deflation. Fat chance!

During Maastricht Treaty negotiations over European integration, it was Germany that insisted on price stability as the sole goal of monetary policy. There were not supposed to be any secondary goals.

And now hypocrites on Germany’s Council of Economic Experts, along with other economists, argue that the European Central Bank should assign more value to financial stability than to price stability. It is utterly clear that the central bank cannot and is not permitted to follow this suggestion.

At the end of the day, whoever uses terms such as “penalty interest” or “redistribution” is undermining the euro. With these unthinking verbal constructs, we are destroying the basis for the monetary union – and might end up where the British are now.


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