Sebastian Matthes is Editor-in-Chief of the Handelsblatt.
It’s a tough road that lies behind the European Central Bank (ECB) and its boss, Christine Lagarde. Almost defiantly, the management of the central bank in Frankfurt’s ECB tower entrenched themselves behind the same justifications for the low interest rate: This rising inflation was “unusual”, but “only temporary”. Media, which raised the long-obvious dangers of inflation to the title, were publicly reprimanded: all scaremongering. It won’t be as bad as in the US.
The reality was different. Even before the start of the Ukraine war, it was clear that the world was facing a prolonged phase of high inflation and weaker growth rates. The green transformation of the economy is driving prices just as much as the global supply problems with important goods. So now the ECB is changing course. However, this turnaround in interest rates does not come months, but years too late.
Because the “specter of deflation” that ex-ECB boss Mario Draghi tried to fight never arose. The turnaround in interest rates therefore comes at an inopportune time. Because the later central banks react to rising prices, the more violently they have to intervene – and the greater the risk of an economic slump.
Germany is now facing a kind of stabilization crisis: Rising interest rates are making corporate loans more expensive; they will be able to invest less, which in turn reduces the demand for raw materials, industrial precursors and other goods. This hits the economy in a delicate phase. Many companies are suffering from high energy prices and a lack of workers, and some may soon run out of gas. Nevertheless, it is good that the turnaround in interest rates is finally coming. If money doesn’t cost anything, it often has costly consequences.
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Fast turning nonsense
This could be seen on the real estate market, where brokers recently got rid of bad junk shacks at exorbitant prices. Someone always reached out. Figures from Immoscout24 show how quickly the market is turning: In the second quarter, demand for residential real estate on the portal fell by 36 percent compared to 2021. The reason: rising interest rates for real estate loans.
>>Read also: The ECB is late in raising interest rates – now the risk of a crash is imminent
In a world where capital is free, all sorts of fast-moving nonsense is funded. This applies to many industries. It was particularly bad for tech companies, where business ideas were valued at billions that never made any money. Exponentially growing delivery services, for example. Netflix has also conquered the world with the help of cheap money. The streaming service invested $17 billion in new films, series and documentaries this year alone – financed on credit: In June, Netflix’s net debt was $8.5 billion. For a long time, shareholders were blinded by this credit-financed growth story, but the share has lost two-thirds of its value since the fall.
The game of such winner-takes-all companies thrived in the zero-interest phase: corporations like Apple and Google have borrowed billions in recent years to buy back their own shares. Earnings per share increased as a result of the buybacks reducing the number of tradable shares. In contrast, the absolute profits of many companies stagnated – or even fell. This trickery is now more expensive.
What politics needs to change
Politicians must also operate differently from now on. Thanks to negative interest rates, the federal government has made good money with new debt in recent years. In 2021 it was almost eleven billion euros. Ministers got used to solving their problems by spending billions, as the reflexes show to this day. But that’s over too. In 2023, Federal Finance Minister Christian Lindner expects interest payments of up to 30 billion euros. In 2021 it was four billion euros. One monetary policy problem remains: Draghi saved the euro in 2012 with the statement that the ECB would do everything possible to prevent the euro zone from breaking up, but he also plunged the central bank into a dilemma. Because the ECB has a mandate to ensure monetary stability. Draghi has declared cohesion to be the new, unofficial goal. To date, however, the ECB has not had a formal mandate to do so. How ironic that Mario Draghi is back in the spotlight today, this time as the outgoing prime minister of the country that could plunge the euro into another crisis.
More: ECB raises key interest rate more than expected and decides on new crisis instrument