Euro-area governments have saved almost €1 trillion in interest payments since 2008, the German Federal Central Bank (Bundesbank) estimated on Tuesday, Bloomberg reports.
That is the result of a combined record-low interest rate policy and an unprecedented bond-buying programme, which currently runs to the tune of €60bn a month, lowering yields across the Eurozone, except Greece.
The calculation is controversial in that it is hard to estimate the opportunity cost of sovereign bond yields in an environment shaped by monetary policy that arguably averts a crisis. One could say, governments “saved” much more than the cost of interest payments, systemically speaking.
But, the Bundesbank took a step further to estimate how much each of the 19 members of the Eurozone has benefitted from European Central Bank Policy. Clearly, the German Central Bank was making a point.
The Bundesbank’s estimate came with a forward warning to finance ministers of the 19-member states Eurozone to make provisions for a higher interest rate environment, as the European Central Bank is expected to unwind its quantitative easing (QE) programme by the end of 2018. The mandate of the German Central Bank is not to issue warnings to other EU member states, but this was in some ways a message to Mario Draghi and fellow board members of the European Central Bank.
The point made, was made subtly.
As a matter of fact and according to the Bundesbank’s own estimates, Italy, the Netherlands, Austria, and France have made savings in interest rate payments to the tune of just over 10% of their GDP, while Belgium follows with comparable gains. In relative terms, these are the biggest beneficiaries.
But, Germany too has saved just under 8% of its GDP in interest payments, while Finland and Portugal have made gains to the tune of 6% of their GDP. Spain and Ireland have made saving close to 5% of their GDP.
But, as the third most indebted country in the world, Italy is Europe’s biggest beneficiary in both absolute and relative terms when it comes to interest payments. Of course, this says little of the side benefits on German competitiveness, for a country that enjoys the biggest trade surplus in the world.
In any event, the International Monetary Fund (IMF) echoed the Bundesbank on Tuesday, noting that Rome has been too slow to take advantage of its economic recovery to reduce its debt-to-GDP-burden. Since its peak in 2015, public debt has been reduced by merely 5%, a process which amply facilitated by record low-interest rates, besides fiscal consolidation measures.
The IMF urges a focus on public sector productivity and measures to boost private sector competitiveness. In the public sector, the priorities signaled are a review of the payroll and a justice system reform to promote contract enforcement. The IMF forecasts that Italian GDP will reach pre-crisis levels by the mid-2020s.