Low interest rates, incomes and assets: The winners and the losers

The low interest rate policy pursued by the ECB and, in particular, the purchase of securities (QE) are having a direct and indirect impact on the incomes and assets of private households in the euro area. As a result, they automatically have implications for distribution policy, both within and between countries. This paper is an attempt to quantify these effects. Our approach involved three steps: first, we looked at the direct impact that changes in the interest rates for bank deposits and loans are having on incomes; second, we examined the effect the low interest rates are having on asset prices and finally, we took a closer look at the individual implications for the portfolios of different income groups.

The results of this analysis can be summarized as follows:

Income effects
• All in all, private households in the euro area are benefiting from the low interest rate policy: over the past six years (2010 to 2015, inclusive), the cumulative "gains" have come in at EUR 130bn (1.4 percent of GDP) or EUR 400 per capita.
• Among the biggest winners are the peripheral countries such as Portugal, Greece and Spain: in all of these countries, the cumulative "interest gains" have exceeded EUR 1,200 per capita since 2010; in Portugal and Greece, these gains came in at around 12 percent of GDP, compared with 6 percent in Spain.
• Germany, on the other hand (together with Belgium and Slovakia), ranks among the losers: German households have certainly had to digest "losses" over the past six years, with the figure amounting to a total of EUR 367 per capita or EUR 29.8bn (-1.1 percent of GDP).
Conclusion: the ECB's zero interest rate policy is having a clear redistribution effect between the EMU countries via the income channel.

Asset effects
• For the entire period since 2010, private households in the eurozone are left with losses to the tune of EUR 130bn. This corresponds to precisely one percent of the assets included in our analysis (as at the end of 2014). Different investment preferences, however, mean that the effects also vary from country to country.
• As monetary policy has gradually been expanded to include unconventional measures, the stronger the negative impact on insurance policies and pension funds has become: for this year alone, we expect this asset class to report losses of around EUR 200bn; this is around half the gross written premiums that all eurozone life insurers are expected to generate.
• In a shorter-term analysis, namely since the ECB launched its explicit euro rescue policy, the overall picture is a different one: since 2012, eurozone private households in all asset classes have been generating "gains" of EUR 1100bn (8.2 percent); this is primarily due to the positive developments on the stock market.
• But these "gains" should also be taken with a pinch of salt: the increases in value only exist "on paper" for the time being, and the direct consumption effects – and, as a result, prosperity effects – are likely to be much lower. If we use a common approach and assume an asset effect on spending of 3 percent, then this effect would correspond to an average of around EUR 10bn a year over the past four years – or 0.1 percent of the eurozone's economic output.
So all in all, the asset effects resulting from the zero interest rate policy are fairly insignificant in a longer-term comparison. Positive effects only become clearly visible from the start of the explicit euro rescue policy.

Distribution effects
• At European level, while the positive income effects continue to increase the further up the income ladder we go, it is the upper-mid income group that is benefiting the most in relative terms.
• The effects on the individual income groups vary considerably from country to country. In Germany, the highest income group is also the group that benefits the most in relative terms, while the lowest income group either benefits the least or actually loses out. No other EMU country shows the same sort of "redistribution from the bottom to the top".
• When it comes to the asset effects, all income groups have been hit by "losses". At 0.1 percent of the respective average incomes, however, they can hardly be described as significant, meaning that there are no distribution effects to speak of. In the shorter term, however, the higher income groups reap above-average benefits.

So all in all, the impact of the zero interest rate policy is an inconsistent one. Particularly for Germany, however, private households rank among the "losers" in terms of both income and asset effects; what is more, the zero interest rate policy is favoring the country's higher income groups – albeit not to too great an extent. So it comes as little surprise that the ECB is a frequent target of criticism in Germany, in particular, with its monetary policy.

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