The financial crisis that began in the United States in 2007 was the origin of the Great Recession. Now the health crisis has an enormous short-term economic impact, which explains the magnitude of the economic policy measures implemented and the cooperation, both public-private and international, to combat the effects of the pandemic in the medium and long term.
During the financial crisis, monetary policy assumed a leading role that remains in effect at this time, with measures that were already exceptional a decade ago. The European Central Bank (ECB) has maintained official interest rates at zero or negative levels, has expanded debt purchases in the markets, and has created new liquidity injection mechanisms so that banks can channel it to households and businesses.
Central banks need certainty about the future to design, communicate, and execute their monetary strategy. At the same time, they are a source of certainty, as they influence the expectations of economic agents with every step they take. ECB President Christine Lagarde stated a few days ago that the monetary measures adopted are providing crucial support for the recovery of the eurozone and the price stability objective. They are “effective, appropriate, and working,” she maintained. Although the European monetary authority has warned on more than one occasion about the potential medium-term risks of extending exceptional measures—and theoretically temporary ones—its priorities are now crystal clear. Only five central banks worldwide currently have negative interest rates. The arguments to justify them range from boosting credit to encouraging spending, including the need to maintain a weak currency that improves exports. Negative interest rates are undoubtedly necessary in extreme situations, but they lose effectiveness and can even be counterproductive if prolonged over time because they penalize savings, generate asset inflation, and deteriorate the expectations of economic agents. Despite these potential risks, a correction of negative interest rates at this time could be interpreted as a restrictive measure. In fact, if the ECB has not lowered them further during the health crisis, it is probably due to the risk that they distort the allocation of resources in the markets and between savers and debtors.
Money growth in the eurozone (of the monetary aggregate, which explains the nominal growth of the economy) is 9.2% in June, double the level considered a medium-term target. Its main counterpart is credit, which has also accelerated strongly in recent months. However, deposits by households and businesses in banks have also grown strongly, in a context of increased private sector savings. The uncertainty arising from the health crisis may undoubtedly be depressing the expectations of economic agents, with the ECB focused on reducing market volatility. But now low interest rates seem insufficient to boost demand.
Money fulfills three priorities: store of value, unit of account, and medium of exchange. Its value is determined by these three objectives, with the interest rate as the price. A prolonged scenario of negative interest rates does not seem to favor demand for consumption and investment. Or, at least, it is not a sufficient condition.
José Luis Martínez Campuzano, spokesperson for the Spanish Banking Association
