So now we’re there. European and Japanese public leaders are complaining against their national central banks’ negative interest rates, and some key commercial and savings banks are threatening not to place their surplus funds with central banks anymore.
Old theories are coming home about inflation gnawing away daily at one’s cash holdings, and the old liquidity preference tenet that after a certain low point in interest rates, no further increases in the quantity of money will reduce it any further.
This is all bringing ever more to the fore that, huff and puff as much as central banks (including the European Central Bank) may do, they will never be able to bridge the gap between the real and the financial economy through the mere use of monetary policy.
What this threat by big European banks – notable among them are Germany’s Commerzbank and the country’s strong savings banks groups – means is that, short of the central banks themselves assuming the private sector’s banks’ own direct roles as lenders to the productive economy, they (the central banks) stand a good chance of becoming almost irrelevant, other than as advisors to governments.
The ECB’s attempt to persuade banks to lend more and help jump-start the eurozone economies has not taken off. Growth prospects in almost all the eurozone states are anaemic at best. There is hardly one tangible real economic sector that is doing universally well, apart from tourism.
Retailing, agriculture, engineering and manufacturing are all in the doldrums and it is not because of an inability to get bank credit but because demand in the eurozone is generally worryingly low.
Some capitalists are extremely savvy at draining whatever savings resources an economy may have generated to build up empires elsewhere
The ECB rate given to central banks who place their extra funds with it – other than the central banks’ statutory reserve funds – stands at -0.4%. For how long will national central banks, and then their own domestic banks, be able to cope with such a hit at their profitability on the net interest margin front?
It may sound exaggerated to state that current forms of financial capitalism are at a point where either they totally restructure themselves, or governments are simply forced to continue shedding ever more of their social onuses in the (forlorn?) hope that resources be directed elsewhere to jump-start their economies.
Across the Atlantic federal rates have edged upwards over the past nine months. Does it tell us anything that concurrently the US economy is moving at fast forward rates on several sectors? What should come first: the real sectors of the economy moving up, or the central banks directly pumping funds into the local lenders’ pockets in the hope that they will in fact boost the possibly laggard swathes in the economy?
In the cases of big economies there would exist scope for targeting support at specific sectors. In smaller economies the task is harder because everyone and his brother will come screaming, often through misguided lobbying organisations, for their own share of the ‘help’.
In Europe there are elements which suggest that certain sectorial weaknesses are turning fast into ripe fruit ready for the picking by other parts of the world. As big Asian and US buyers move with shooting guns (bags of cash) into Europe’s airline and motor car industries, its food production industry, various sectors of the leisure industry (Inter-Milan the latest to go Chinese), and others, one cannot help not being reminded of the former Jim Slater’s asset-stripping talents.
He and his ilk became rich but the assets would often no longer be there. And so the question again beckons: should banks be made to grovel so much as to lend to such weakening sectors in an effort to just keep them alive or keep them national?
That is a real issue. But equally real and correct is when Mario Draghi makes it clear to governments and politicians that it is their decisions, and not the ECB’s, in the present conjuncture, that will swing situations round.
Decisions about large infrastructural works, labour markets, educational policies and fiscal policies which, as Alfred Sant rightly holds, should not be identical (harmonised?) across whole blocs.
There is of course a flipside. In many countries some capitalists are extremely savvy at draining whatever savings resources an economy may have generated to build up empires of holdings located not in their own domestic economy but elsewhere.
They do this either through their own capital markets or by using cross-border mechanisms (e.g. financial passporting possibilities in the EU). If these adventures are profitable, to who are they really so: to such savvy personalities in their own personal name, and never to the domestic home country’s fiscal resources?
Should central banks, the local banking systems, and the local capitalmarkets, be forced in some manner to ensure that national economic interests override personal interests through appropriate policies?
There is much to suggest a totally different ball game by the end of this decade. If governments wake up to realise that it is key decisions in the real economy that will save their countries, rather than in their financial sectors, then we may hopefully reach a stage in the future where we worry more constructively about exports, employment, production, sales, and bottom lines in balance in P & L accounts, rather than what the next EU financial services regulation or directive will be hitting at.
John Consiglio teaches economics at the University of Malta.