Conservative Europeans need to invest

If you could borrow as much as you might wish to at an interest rate of close to zero over 10 or more years, you would surely do so. There would be no lack of projects that promised wealthgenerating returns of at least 1% per year.

Of course, such funding opportunities are not readily available to any ordinary business or household. Lenders would demand a premium to cover the risk of default and therefore raise the prospective returns potential investors would have to achieve.

But such considerations do not apply to the German, Japanese or Netherlands governments, or even Brexitstressed Britain. These governments can borrow as much as they wish at very low rates. And the Swiss government can borrow at a negative rate of interest — lenders pay for the privilege of funding the government for 10 years and longer.

Surely an extra bridge or highway, port or pipeline can promise a 1% per year return? If governments would exercise such opportunities to borrow more at invitingly low rates — also, heaven forbid, to possibly cut income and expenditure tax rates — aggregate demand for goods and services would be stimulated. And businesses would add to their productive capacities while depressed rates of growth of GDP and accompanying incomes would accelerate. Demand for credit, especially bank credit, would be encouraged, and bank balance sheets would strengthen while the national savings rates declined and interest rates rose, for very good reasons: demand for capital to invest would be rising faster than the supply of savings.

The failure to respond sensibly to an extraordinary level of savings and the accompanying low interest rates is the essential European economic problem. The rate at which the Germans have saved has increased dramatically since 2000, while the rate at which they have added to their stock of capital fell away.

In 1995 Germans saved about 22% of their incomes, a very high rate for a developed economy. They are now saving 28% of their GDP, which is forecast to rise further. They add to their capital stock at a rate of 20% of GDP. This has meant larger flows of capital out of Germany into global capital markets. In 2018 outflows of about $400bn were estimated.

The Dutch are now saving a similarly high proportion of their incomes and the Japanese are a further major source of global savings.

The Chinese save at an even higher rate, more than 40% of GDP, though the rate at which savings are made and capital formed has fallen. China is no longer a significant contributor to the global savings pool, a fact that may well inhibit its ability to stimulate its economy.

The contribution in 2007 to the global savings pool from China, Germany and Japan amounted to nearly $1-trillion, compared to a mere $100bn seven years before. It is now about $600bn.

The borrowers to absorb these surpluses at low interest rates were naturally found in the credit-hungry US. Inflows of capital to the US expanded dramatically after 1995 — much of it funding houses that had to be abandoned by their owners after 2008. The average US home lost 30% of its pre-global financial crisis value. No mortgage-based financial system could hope to survive a collapse in asset values of this magnitude without a bailout.

Less, not more, austerity is urgently called for in northern Europe to help save the euro and the European project. The Italians and other populists are on the right track, while the German fiscal conservatives continue down a dead end.