The Saver’s Dilemma

BRUSSELS – Interest rates are now close to zero throughout the developed world (the United States, Europe, and Japan). But the global economy is slowing down, and financial markets went into a tailspin during the summer. This suggests that the problem is more profound than one of insufficient monetary stimulus.

The heart of any economy is the mechanism by which funds are channeled from savers to investors. In normal times, capital markets perform this function smoothly; but these markets break down from time to time, owing to sudden large changes in perceptions about the riskiness of important asset classes.

In the US, this happened when investors discovered that even AAA-rated asset-backed securities were in reality risky. China experienced a similar surprise when the US government lost its AAA rating. But nowhere is the problem as acute as it is in Europe, or, rather, the eurozone, where German savers are suddenly discovering risk across the European periphery.

What is true of Germany is also true of most of the countries of Northern Europe, many of which now run current-account surpluses that are even larger as a proportion of GDP. These countries’ households continue to save, accumulating deposits at their local banks and buying bonds from their local wealth managers. But they feel that the eurozone has become such a dangerous place that they no longer dare to invest abroad.