The Money’s More Than Free. Why Won’t Europeans Borrow?

When it comes to interest rates, the U.S. and Europe are upside down.

A big worry about the expected interest-rate cut in the U.S. is that it will encourage too much borrowing, inflating bubbles in debt and equity markets. A big worry about the expected interest-rate cut in Europe is that it will discourage borrowing, with many companies, households and governments paying down debt even with negative central-bank rates.

Of course, the two regions face plenty of shared troubles: inflation is stubbornly low, pay rises are surprisingly low given how low unemployment is, and populist politicians are harder to predict.

But the behavior of American capitalists is at least easy to understand. When rates are cut by enough, speculators borrow to buy riskier assets; companies borrow to buy each other and their own stock; and, to some extent, entrepreneurs borrow to expand their businesses.

Those looking enviously across the Atlantic at negative interest rates in the eurozone may be surprised by the lack of a debt-driven boom. There are dozens of companies with old bonds now trading at negative yields, some maturing as far out as 2023. Yet only a handful of companies have issued euro-denominated bonds with a negative yield (done by paying no coupon and selling them for more than they repay at maturity).

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Why do you think Europeans won’t borrow, even with negative interest rates?

European companies stubbornly refuse to borrow. Since the European Central Bank brought in negative rates in June 2014, nonfinancial corporate debt to GDP in the eurozone is up by just 0.5 percentage point, to 105%, according to the Bank for International Settlements, and it is still far lower than in 2015.

Why won’t Europeans borrow? Which explanation you prefer determines whether you think the European Central Bank is right to be considering another cut.

My favorite is that it is cultural. Frugal northern Europeans don’t want to borrow no matter the interest rate, while free-spending southerners don’t have access to cheap money due to their troubled banking systems and relatively high government-bond yields.

Those in between, such as French, Belgian and Dutch companies, are increasing their debts, but only just offsetting the deleveraging in places such as Spain, Italy and Portugal. Three of the companies that have issued negative-yielding euro bonds—


Thales and


—are French, in the rare position of being both willing and able to take advantage of the ECB’s low rates. Further rate cuts will do little in the north or south, but push the middle to borrow even more.

But there is clearly an effect from other explanations, too. Aging German savers seem to save even more when interest rates are cut to reach their target retirement pot. The weak European economy doesn’t present many opportunities to make money, so there is little reason to borrow to build a new factory.

The recent slowdown in Europe’s economy is in large part due to the impact of the U.S. trade battle with China and White House threats of tariffs on European cars, to which the export powerhouse of Germany is particularly exposed. German manufacturers are unlikely to want to borrow more given the risks to their sales, no matter the interest rate.

In Europe, as elsewhere, shareholders punish companies with high capital spending by giving them a lower valuation, as


chief global equity strategist Robert Buckland points out. But there are few shareholder activists in Europe pushing for more debt to be used to buy back stock, unlike in the U.S.

Worse, European companies rely more than those in the U.S. on banks, and negative rates amount to a tax on the banking system, which is still in poor health.

Negative rates do help by supporting existing borrowers, including governments, important when many European countries are still struggling with heavy debt loads.

And it is plausible that negative rates have worked, after a fashion. Eurozone investment since rates went negative in June 2014 has been slightly ahead of the U.S., as measured by gross fixed capital formation, which takes no account of depreciation. Roughly the same number of jobs have been created in both economies since then, too.

Still, further negative rates are unlikely to do much to encourage the frugal north to borrow, and will only apply a minor salve to the troubles of the south. The debt boom in the middle is already starting to look a bit excessive. European governments really need to stop relying on the central bank to solve their problems. Unfortunately, they can’t agree to do anything else.

Write to James Mackintosh at

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