Kiel Institute Focus
|No. 25 June 6, 2014 |
by Joachim Scheide and Björn van Roye
The ECB’s low interest rate policy: The German economy at risk
The European Central Bank (ECB) continues its low interest rate policy. Since it relies on the average price development in the euro area for its monetary policy, a key rate currently amounting to 0.15 percent appears to be appropriate as inflation is low and the economic recovery is sluggish. However, the member countries are in different situations as far as the business cycle is concerned, which means that the level of interest rates is not appropriate for all economies. Monetary policy has already been too expansionary for the German economy for a number of years now. And due to the unconventional measures, the degree of expansion is even intensified. Consequently, a boom is imminent in Germany which is typically associated with substantial undesirable developments, in particular the misallocation of capital. This increases the risk to financial stability and could lead to a massive economic setback.