(Bloomberg Opinion) -- Euro zone finance minsters are pushing back against the negative rate regime of the European Central Bank just as Christine Lagarde takes the reins from Mario Draghi.
This is yet another rerun of the battle between the economically strongest (essentially northern) European nations and their weaker partners over who should shoulder the burden for maintaining stability in the euro zone. As my colleague Ferdinando Giugliano contests, it's pretty rich that the wealthier countries are complaining about the nasty side-effects of sub-zero rates when they could make them unnecessary by turning on the fiscal taps.
In fairness to the northern nations, there's certainly evidence to challenge the effectiveness of negative rates, as the chart below shows. But things would no doubt be even worse were it not for the ECB's regular doses of monetary stimulus.
And despite the recent bout of complaints from euro zone politicians and the more hawkish members of the ECB's governing council, the central bank has in fact started to take account of their critique by adjusting its negative rate mechanism. With pretty startling effect.
Until very recently, commercial banks had to swallow the entire cost of the ECB's negative lending rate for holding 1.8 trillion euros ($2 trillion) of their combined excess reserves at the central bank. But at the end of October, the ECB officially started “tiering” the rate it charges on those reserves, thereby moving 800 billion euros of these deposits out of the most punitive -0.5% band, and lifting much of it toward a zero rate.
As a result, so-called “general collateral refinancing rates” — the level people in the market charge to borrow and lend the vast majority of government bonds — has risen in line with the higher tier ECB rate. That's because that 800 billion euros (which, ironically, is mostly from the stronger banks in the wealthy northern nations) has been freed up to be spent elsewhere. In turn, that has pushed up yields on short-end European government bonds. So despite the ECB's 10 basis point rate cut to -0.5% in September, the net effect has in fact pushed yields up by about 20 basis points:
This parting gift from Draghi was really a tacit admission that negative rates aren't working properly. So finance ministers have already got their effective relief on bank rates and perhaps they should quit kvetching at the ECB and get their own house in order with some braver budgetary decisions.
Lagarde has a daunting task in convincing recalcitrant governments to get their checkbooks out to help themselves and the wider euro project. Yet again, the ECB has already done its bit; a proper shift toward fiscal stimulus would let it lift the burden of negative rates further still. The politicians must make the next move.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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