In light of the ongoing low interest rate environment across the Eurozone and the cut in interest rates by the European Central Bank to a record low of 0.25 per cent, Jens Weidmann, president of the Deutsche Bundesbank, made it clear that the “country’s army of savers” will not face special discrimination since the entire Eurozone, and not only Germany, is dealing with this reality. He stressed the fact that the European Central Bank did not set monetary policies for individual countries but for the whole Eurozone. The ECB responded thus to fears of deflation across the Eurozone by unexpectedly cutting rates to a record low but also underlined that it has other tools in its “artillery” to prevent price falls. While pointing out other benefits directly related to the cut, including falling costs of corporate debt in Germany and peripheral countries, Mr. Weidmann cautioned that these very low rates should not be allowed to stay in place for too long, since over the long term they can also present significant risks.
If this is not a schoolbook example of Financial Repression, what is? The current ECB’s low interest rate policy is clearly a central element of the combined set of financial policies that allow governments to keep real interest rates extremely low or negative with the help of central banks. German savers have every reason to worry because, in fact, this allows governments to continue issuing sovereign debt at an artificially low cost, obliterating the real value of people’s savings in the process. In EuroFinUse’s Conference on Financial Repression, jointly organized with our Austrian member organization IVA in Vienna last October, a consensus emerged during the discussion: Financial Repression is causing all savers – institutional and individual – to lose money, since money is essentially being driven into the acquisition of government bonds and not into the real economy.
So what can be done to alleviate this burden? Guillaume Prache, EuroFinUse Managing Director, believes “it is time to go back to basics and return to simple low-cost long-term saving products. The good news is that there’s one product that was invented a very long time ago: it is called equities.”
Please read the Financial Times article here.