The European Central Bank has a new opponent: ex-constitutional judge Paul Kirchhof. The lawyer considers the negative interest rate policy to be a violation of the constitution. However, this does not make any economic sense.
The financial assets of the Germans are gigantic. During the Corona crisis it climbed to a record level, the Bundesbank estimated the volume at just under 7 trillion euros at the end of 2020. The trend is rising. The lion’s share is in bank balances, cash, and bonds. Only a small proportion is invested in stocks.
As unevenly as wealth is distributed and even if many Germans (cannot) put any money back: The outrage over penalty interest rates at banks – often referred to as “custody fees” – is great in this country. And so the ex-constitutional judge Paul Kirchhof hits a nerve when he describes negative interest rates in an expert opinion as unconstitutional and sees the monetary policy of the European Central Bank as an “expropriation of savers”. In Germany, the idea is actually widespread that savers are entitled to interest. Economically this is nonsense, but humanly understandable.
According to the comparison portal Verivox, 349 banks are currently charging negative interest rates from private customers – almost twice as many as they were at the end of 2020. And now the third largest German bank ING has announced that it will in future charge negative interest from an allowance of 50,000 euros.
The background: for decades, real interest rates – that is, interest rates taking inflation into account – have tended to decline worldwide. Economists disagree about the reasons. The financial crisis has exacerbated this trend as the major central banks responded to the economic slump with ultra-loose monetary policies. Interest is the price of money, and it depends on supply and demand. The fewer households consume and the fewer companies and the state invest, the lower the interest rates.
What to do with the money
Negative interest rates are a result of too much being saved and too little invested. Germany’s banks are literally flooded with savings – they don’t know what to do with them. Meanwhile, the ECB is charging the banks penalty interest if they park the money at the central bank. And these costs are increasingly being passed on from them to their customers.
However, the ECB is not to blame for the low interest rates. It reacts to the macroeconomic environment, which can only be influenced by monetary policy to a limited extent. However, that does not change the fact that it is criticized by the banking lobby and politicians for low interest rates.
Nobody is forced to be punished by the interest rate level. If you have a lot of money in your account, you can put some of it in stocks, for example. In the long term, it has long been possible to achieve higher returns on the stock market than the interest that banks offer for savings books and fixed-term deposits. The savings book, which is so popular in Germany, has always been a bad investment.
That doesn’t mean savers should be putting all of their money into the stock market now. But it should be worthwhile to invest long-term and broadly diversified there – for example through savings plans in index funds.
One problem is that stocks don’t have a particularly good reputation in this country. For many small investors, the debacle surrounding the T-share, for which Manfred Krug had eagerly promoted the drums, is likely to be stuck in their bones. The fact that bank advisors talked into their customers with complex, high-risk and suddenly worthless financial products before the financial crisis caused a lasting loss of trust. And then there are the crashes on the stock exchanges: the dot-com bubble, the Lehman collapse or the corona crash keep savers away from the stock market – regardless of the fact that the stock exchanges have repeatedly recovered from slumps.
Regardless of how you feel about investing on the stock market: There will be no appreciable interest on savings parked in accounts for the foreseeable future – regardless of what Kirchhof thinks of it.
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