German industrialists fear cheap money
Leading German industrialists have sounded the alarm over the European Central Bank’s move to drive down interest rates, warning that cheap money is causing volatility and could create “another bubble”.
Wolfgang Buechele, chief executive of Linde, the industrial gas and plant engineering group, told the Financial Times: “You hear from national bankers and the ECB that we have to focus in the future on managing bubbles. So this is of course something that concerns me — because quantitative easing is pumping plentiful funds into the economy without actually achieving what is intended. The growth is not really boosted.”
Bernd Scheifele, chief executive of HeidelbergCement, the world’s third-largest cement producer by sales, said: “In the long run, we are concerned that cheap money will reduce the competitiveness of European industry vis-à-vis Asian and US competitors. Cheap money obviously makes life easier — but that’s not good.
“I’m concerned that this will lead to another crazy scenario,” he added. “I have a certain unease. Is this a sustainable, healthy environment? I’m not sure ... I’m concerned that this leads to another bubble.”
The comments reflect growing disquiet in Germany over the ECB’s bond-buying programme, known as quantitative easing, which was launched in January.
The ECB’s actions have helped cut borrowing costs for companies and weakened the euro against the US dollar, making exports from the eurozone more competitive. Share prices have also jumped.
However, the low-interest rate environment is contributing to huge volatility in bond markets and has caused the cost of funding employer pension schemes to surge, thereby impairing some corporate balance sheets.
Addressing an audience of German business leaders last week, chancellor Angela Merkel defended the central bank saying: “At the very least I’d like to ask for your understanding that central banks, like the European Central Bank, have to think about what to do if the inflation rate is so low and to ensure that we don’t end up in a deflationary cycle.”
In the wake of a collapse in investment in Europe following the 2008 crisis, the ECB hopes lower borrowing costs will help to drive an expansion in corporate investment.
Yet in spite of nascent signs of a recovery in the eurozone and of bank lending, many European companies remain reluctant to take on risk and prefer to deleverage, retain cash or return funds to shareholders.
“The volatility of the economy is increasing as a result of these measures, and from that point of view companies need to be even better prepared,” said Mr Buechele.
“We are obliged to run a stable balance sheet … rather than embarking on opportunistic possibilities that might not be beneficial in the long run.”
Mr Scheifele said: “You also have to look for growth opportunities but one has to be careful and disciplined because obviously the zero money policy leads you in a way that you make investments that you would not make if there was a cost-item related to lending money.
“If you look at the M&A deals of the world that we’ve seen in the last months — especially in the pharma area — we’ve seen some transactions that I would say were fully priced,” he explained.
Last week, HeidelbergCement said it would return more cash to shareholders by increasing its targeted dividend payout ratio. It will also consider share buybacks.