Deutsche Bank, once one of the giants of European finance, is in deep financial trouble. Matt Egan of CNN Business helpfully summarizes the difficulties,

Germany’s biggest lender israpidly slashing jobs,it’slosing a ton of moneyand the stock is trading near all-time lows.

Many of Deutsche Bank’s problems are self-inflicted. It’s been badly mismanaged. Deutsche Bank (DB) never fully cleaned up its crisis-era balance sheet. Restructuring efforts fell short. And itscountless legal black eyeshaven’t helped matters.

But Deutsche Bank’s struggles have also been amplified by something the 149-year-old lender never imagined, mostly because it had never happened before in modern history: negative interest rates.

The European Central Bank has been charging negative interest rates since 2014 in an attempt to stimulate sluggish European economic growth. These negative interest rates act effectively as a tax on banks hurting bank profitability across Europe and contributing to a wider economic slowdown:

The Euro Stoxx Banks Index, a basket of eurozone lenders, is down by more than 40% since the ECB ventured into negative interest rates.

While the eurozone enjoyed a growth spurt in 2017, the economy has slowed significantly of late, in part because of global trade tensions and demographic challenges. Draghi, the outgoing ECB chief, warned last week that the eurozone’s economic outlook is getting “worse and worse.”

“Monetary policy in Europe has been spectacularly unsuccessful,” said David Kelly, chief global strategist at JPMorgan Funds. “These negative rates are counterproductive. They are slowing the European economy down.”

Kelly noted that Europe’s economy depends more on bank lending than America’s because the European capital markets aren’t as deep.

“The banking industry cannot flourish on negative rates,” he said. “And that is acting as a drag on the entire European economy.”

Tyler Cowanrecently observed in his Bloomberg columnthat these negative rates have caused Germans, historically heavy savers, to e more critical of a Eurozone which seems increasingly at odds with German cultural norms:

Step back and consider the cultural context. Germany is still scarred by the memories of two world wars, munism, deflation and hyperinflation: in general, huge instability. Since the end of World War II, however, personal savings and the banking system have been an oasis of predictability and a driver of growth. Many Germans treasure their frugality, perhaps excessively or irrationally, and it has e an important part of the narrative Germans tell themselves about the economic order they have built.

Now enter the ECB, in essence telling Germans (and others) that savings are a bad thing, to be taxed and penalized. The very word “negative,” as in “negative interest rate,” makes the policy hard to sell politically. The German word “Strafzinsen” refers to a penalty rate, but the root “Straf” also refers to punishment, and it was used effectively by Franz Kafka in his famous torture-laden short story “In the Penal Colony” (the German title is “In der Strafkolonie”). One German newspaperreferred tothe “final expropriation” of the German saver, noting that the ECB’s decision to deviate from its inflation target carries “grave consequences.”

These norms, far from being unique to Germany or Germans, are the necessary moral foundations for a market economy, as the German economist Wilhelm Röpkeonce observed:

The market economy, and with it social and political freedom, can thrive only as a part and under the protection of a bourgeois system. This implies the existence of a society in which certain fundamentals are respected and color the whole network of social relationships: individual effort and responsibility, absolute norms and values, independence based on ownership, prudence and daring, calculating and saving, responsibility for planning one’s own life, proper coherence with munity, family feeling, a sense of tradition and the succession of bined with an open-minded view of the present and the future, proper tension between individual munity, firm moral discipline, respect for the value of money, the courage to grapple on one’s own with life and its uncertainties, a sense of the natural order of things, and a firm scale of values.

The European Central Bank, in a misguided attempt to stimulate growth, has weakened the financial sector across Europe and contributed to the erosion of the moral norms necessary for a truly free market.

(Photo Credit: “The Seat of the European Central Bank and Frankfurt Skyline at dawn, as seen from west” DXR CC BY-SA 4.0)