In a speech in Frankfurt on May 2, 2016, ECB president Mario Draghi made a speech in which he addressed the causes of low interest rates across the Eurozone. He began by acknowledging that very low interest rates stress the very business models of banks, pension funds, insurance companies, and other financial institutions which rely on interest income as a large portion of their profits. They also put stress on the incomes of pensioners.
Though the “mandate of each central bank is phrased in strictly domestic terms,” he said, it is important for the central banks to think in terms of the international economy, which, at this point in time, is facing extremely low interest rates. 18% of the global economy today is operating in an economic climate of negative central bank interest rates. 40% is operating in an environment of negative, zero, or 1% interest rates.
Mostly, Mr. Draghi stressed that very low interest rates are not the generators of these difficulties. Very low interest rates are “the symptom of an underlying problem, which is insufficient investment demand, across the world, to absorb all the savings available in the economy.”
The solution to these problems, Mr. Draghi claims, lies in thinking about the long term. If low interest rates are not a cause but a symptom, the solution must lie in attacking the underlying problems, not just in the EU but globally.
What does that mean? In the short term, it means expansionary macroeconomic policies in the Eurozone, which will help increase inflation to the target range. In the long term, stable real rates can only be reached through “structural reforms that elicit a structural rebalancing of saving and investment. Higher real returns on savings must come through decisive action on the supply side.”
Finally, specifically in the EU, there is a third policy tool which can aid in both the short and medium terms: governmental reform that reaches cross-border throughout the Eurozone. Mr. Draghi closed with an emphasis on this tool, championing it as the most efficient way to achieve institutional reform across the European Union that will lead to the greatest economic benefits.
In a speech in Frankfurt on May 2, 2016, ECB president Mario Draghi made a speech in which he addressed the causes of low interest rates across the Eurozone. He began by acknowledging that very low interest rates stress the very business models of banks, pension funds, insurance companies, and other financial institutions which rely on interest income as a large portion of their profits. They also put stress on the incomes of pensioners.
Though the “mandate of each central bank is phrased in strictly domestic terms,” he said, it is important for the central banks to think in terms of the international economy, which, at this point in time, is facing extremely low interest rates. 18% of the global economy today is operating in an economic climate of negative central bank interest rates. 40% is operating in an environment of negative, zero, or 1% interest rates.
Mostly, Mr. Draghi stressed that very low interest rates are not the generators of these difficulties. Very low interest rates are “the symptom of an underlying problem, which is insufficient investment demand, across the world, to absorb all the savings available in the economy.”
The solution to these problems, Mr. Draghi claims, lies in thinking about the long term. If low interest rates are not a cause but a symptom, the solution must lie in attacking the underlying problems, not just in the EU but globally.
What does that mean? In the short term, it means expansionary macroeconomic policies in the Eurozone, which will help increase inflation to the target range. In the long term, stable real rates can only be reached through “structural reforms that elicit a structural rebalancing of saving and investment. Higher real returns on savings must come through decisive action on the supply side.”
Finally, specifically in the EU, there is a third policy tool which can aid in both the short and medium terms: governmental reform that reaches cross-border throughout the Eurozone. Mr. Draghi closed with an emphasis on this tool, championing it as the most efficient way to achieve institutional reform across the European Union that will lead to the greatest economic benefits.