Questioning Lagarde as Gross Interest Income in Germany Heads Towards Zero


Thanks to negative interest rates, Germans interest income has plunged towards zero.

Counterproductive Interest Rate Policy

Eric Dor, Director of Economic Studies at the IESEG School of Management in Paris emailed an article with some interesting charts regarding the Counterproductive Interest Rate Policy of the ECB.

What follows is a guest post by Dor, with my comments at the end. I added or changed some subtitles.

Collapse of Interest Income in Germany

The extremely accommodating monetary policy of the ECB has had huge redistributive consequences. The disposable income of savers has been hit by the collapse of the average return on their accumulated wealth invested in interest products. Low interest rates have benefited borrowers. By boosting asset prices, the decline of interest rates has also favoured the small segment of wealthy households who own securities, potentially increasing inequality.

ECB Monetary Policy

The ECB has used various instruments to push down market and bank interest rates in the euro area. The instruments used by the ECB are its traditional key interest rates, hereafter summarized by the deposit facility interest rate, recent unconventional tools like massive asset purchases known as QE, and forward guidance about the expected path of its policy. All these instruments have a decisive impact on market short term and long term interest rates, as shown on the following chart.

Money Lost and Gained

It is interesting to compute what German savers have lost by comparing their effective interest income to a hypothetical situation where they would have remained at their level of 2012. It is easily computed by adding up the difference between effective gross interest income and their level of 2012.

The monetary policy conducted after 2012 has implied a cumulative loss of gross interest income of euro 158 billion for German households until 2019.

Of course, the monetary policy has benefited German borrowing households. After 2012 and until 2019, German borrowing households “saved” a cumulative 99 billion of interest expenses. It is computed by adding up, for all the years after 2012, the difference between effective interest expenses and their initial level.

The net result is a loss of euro 58 billion to German households.

Counterproductive Policy

The ECB has been engineering an overall decrease of interest rates hoping that cheap credit opportunities would lead households and companies to increase their spending. The problem is that this policy may lead to the opposite result, if households decide to offset declining returns on savings by saving more.

Evidence shows that it is what happens in Germany. The saving rate of households has been continuously increasing since 2014.

German Savings Rate

Banks Harmed

Low or negative interest rates are also decreasing the net interest income of banks. It threatens their profitability perhaps decreasing their supply of loans to the private sector.

End Dor Article

On August 30, I commented Lagarde Praises Negative Rates, Study Shows They Reduce Lending

This common-sense report by Dor also strongly disputes Lagarde's view.

Twilight Zone

Fed vs ECB

Whereas the Fed bailed out US banks by paying interest on excess reserves, the ECB charged banks interest on excess reserves draining bank profits.

Negative interest rates unquestionably hurt EU banks and there is no evidence of Lagarde's proposed counter-benefits.

A European banking crisis awaits.

Mike "Mish" Shedlock

Comments (28)
No. 1-15
Tony Bennett
Tony Bennett

"The problem is that this policy may lead to the opposite result, if households decide to offset declining returns on savings by saving more."


That would have been my guess. Furthermore (if Germans are more prudent than Americans) I would take a leap and say the best way for them to "invest" is by paying down higher interest rate debt. If not planning on walking away from an obligation, this is a guaranteed way to improve household balance sheet.


Well you know what the are going to do. Instead of trying to nomalize rates, or at least get them modestly into positive territory, instead I'll bet that they start charging "fees" for balances in savings/deposit accounts.

The mindset will never change.

Tony Bennett
Tony Bennett

"Whereas the Fed bailed out US banks by paying interest on excess reserves, the ECB charged banks interest on excess reserves draining bank profits."


Allowing European banks to load up on sovereign EU debt with ZERO reserves not exactly brilliant ... and why TPTB will move Heaven and Earth to keep EU together.

Grexit would have cost core European banks (which would have to have been bailed out by taxpayer) hundreds of $billions. Tsipras folded while he held all the cards. Blackmail? Payoff?

blue peacock
blue peacock

Noting the performance of EU banks stocks it should be clear that the ECB is destroying their banking system. What next when a recapitalization is required?


Doesn't Gibson's paradox state that interest rates and prices are positively correlated? Why do all these monetary policy makers (monetary politicians?) think they can create more inflation by lowering the interest rate to stave of deflation?

Of course lowering the interest rate sparks saving. If you are trying to amortize capital or save for a pension, each drop in the rate of interest means you need so much more cash flow to achieve your goal. Lower rates, higher bond price, decreasing NPV of current contributions, higher NPV of future income.

Weiner adduces an example, where Larry needs to save M$116 today to achieve the same pension income goal as did Clarence in 1980 for $100,000. (