The net interest income of private households

In summer 2017, the ECB made a surprising move by releasing calculations on the net interest income of households in various EMU countries. According to the ECB's data, the income effects of the low interest rates were low in general (totaling up to 2% of GDP at the most), to the extent of being negligible in Germany. What is more, there were no signs of any pattern emerging with regard to the effects - with more positive effects on the (indebted) "south" of the continent and more negative effects on the (thrifty) "north".

These results can be explained primarily by the assumptions underlying the calculation: first, the ECB uses interest rates after the allocation of financial intermediation services indirectly measured (FISIM), which has a dampening effect on the changes in net interest income. Second, the ECB abstracts from changes in stock in order to isolate the pure price effect. Finally, the ECB also opts not to cumulate the annual changes and merely compares the start and the end of the development.

If these assumptions are altered, then the development in net interest income tells a different story. If we leave financial intermediation services indirectly measured out of the equation (interest before FISIM) and take the changes in stock into account, then the fluctuations in net interest income are anything but trivial.

The net interest income of German households, for example, has dropped by EUR 15 billion since 2008; all in all, the annual losses incurred during the years of the low interest rates come to just shy of EUR 100 billion or 3.1% of GDP. This means that German households rank among the losers of the extreme monetary policy.

And they are not alone: other countries renowned for being "savers", such as Belgium (-9.8% of GDP) and Austria (-3%) are having to digest hefty losses as far as net interest income is concerned. On the other hand, "debtor countries" such as Spain (+11.2%) and Portugal (+14.1%) are reaping substantial benefits. This means that the well-known narrative of the period of low interest rates - good for the "south" and bad for the "north" - continues to apply.

At first glance, Italy would appear to be the exception to the rule: here, too, the cumulative drop in net interest income is a very substantial one (-9.8% of GDP). First, however, Italian households are by no means highly indebted and second, they stand out due to their particular investment behavior: nowhere else in the eurozone are there so many bonds in private portfolios as there are in Italy.  The correction to this preference in times of low interest rates made a significant contribution to the pronounced slump in interest income.

Conclusion: The ECB's calculations are very dependent on its specific assumptions. Using different but not unrealistic assumptions, the analysis of the development in household net interest income shows that persistently low interest rates have a dramatic impact on income: also, and particularly so, in Germany.

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