What purpose should negative interest rates serve?

The policy of zero or even negative rates takes us into a Baroque world where central banks charge banks that place their cash assets with them, and where clearing banks can remunerate clients to whom they provide credit. It is such an innovative policy that it blurs economic agents’ references. But innovative does not always mean relevant.

Is this monetary policy justified? There’s room for discussion. As Jacques de la Rosière reminded us here a couple of days ago, the ECB is trying to reach an inflation target (2%) that nothing leads us to believe is relevant today, and much less so tomorrow. The third industrial revolution, which constitutes the main contemporary “economic infrastructure”, is not yet generating much gain in productivity. It is rather classic. All innovative schumpeterian cycles take time to produce an effect. For the time being, productivity gains are being held back in businesses due to organisation and management which are more in line with the Ford model of production than with that of the artificial intelligence economy. But, when the organisations adapt, productivity will take off, businesses’ unit costs will go down and deflationary pressure will be accentuated. Will it then be necessary to maintain a target of constant inflation? And is the currently weak euro zone inflation (just above 1%) a problem? Who can say that our economy would be better off with inflation at 2%?

Bear in mind that the economy of the euro zone does not suffer from a conjunctural insufficiency of overall demand for which a monetary boost would be indicated. The zone does present a large current surplus reflecting a savings glut on investment. But this excess is structural, and its cause has been identified: the dogmatic reticence of Germany to lower taxation or to finance infrastructures. Global budgetary policy in the euro zone is badly adjusted. It is not a monetary matter.

Is this negative rate policy effective? If it is aiming to push economic agents to stop saving and to start spending or investing, then it has failed. There is no gain to be had in saving. But saving behaviour is currently much more in line with Keynesian than neoclassic theory. Zero rate policy sends out a worrying dysfunctional signal to economic agents that encourages them to save even more on cash supports. As for businesses, this policy does not increase investment, which is paralysed by negative anticipations. Lastly, negative rate policy and the outline of the yield curve that goes with it, will end up causing the ruin of commercial banks whose intermediation actions become unprofitable. Is the ECB seeking to obtain the monopoly of credit financing of the economy? I would just as worried about that situation as I would be about the development of private currencies like Libra.

For all this policy can be criticised, it is nevertheless the one chosen by the ECB. How can we make the most out of it? Some suggest that the states should go further into debt, to fund the ecological transition, for example. This reasoning is wonderfully demagogical but incomplete. It all depends on the country. Germany is a bad example in Europe when it comes to carbon emissions, but it has every interest in using debt for its energy transition. But that is not the case for France or Italy. If there is any advantage in negative rate policies, it is that they enable debt stock to be reduced rapidly, just like inflation in the past, as rates are much lower than the increase of nominal GDP. Thus, countries that have a lot of debt in this period see their rate of debt increase and risk insolvency when the negative rate policy becomes unsustainable.