If it’s not Pfizer, then it’s European savings for Ursula

This week, I came across an article on social media about idle cash. The article cited remarks by the President of the European Commission at a French business event, in which President von der Leyen stated that Europeans collectively hold approximately €11.5 trillion in idle cash in their bank accounts. Initially, I dismissed the headlines. However, upon reflection, I recognised the importance of critically examining President von der Leyen’s statements and their implications. Her remarks indicate a limited understanding of economic theory, particularly Liquidity Preference Theory as described by John Maynard Keynes. Keynes identified three primary motives for individuals holding cash.

The liquidity preference theory

The first motive is a transaction motive. People need cash for day-to-day living as well as business transactions. The demand reflects one’s income level rather than the interest charged on the market. The second motive is the precautionary element. People hold cash as a safety buffer in case of a force majeure event, including war or emergency medical costs. This is driven mostly by income rather than the interest rate. And the third motive is speculative, where people keep money to invest in future opportunities, such as improved bond prices or interest rate improvement. Low interest rates increase demand for cash while high interest rates reduce it. Besides, cash deposits are not idle. Banks use that cash to dish out credit.

Banking regulations and competitiveness

Moreover, we have many regulations in place that were put in place after the financial crisis, which choked investment. Banks are not allowed to provide credit as they were in the past due to the highly regulated markets. Even in the Draghi report, it is noted that the EU needs to revise its banking regulations to compete with those of the United States and China. In fact, people will still hold money for precautionary reasons, and one of those relates to an event such as war. And let’s face it, President von der Leyen is associated with defence matters, and therefore one would expect a more nuanced understanding of precautionary motives. But in truth, I cannot understand her logic. At times, von der Leyen tries very hard to emulate Margaret Thatcher but runs counter to the latter’s economic beliefs. Margaret Thatcher’s economic policies were Hayekian. Ursula von der Leyen’s economic policies, however, appear inconsistent, from the centralisation of power to measures that have placed significant strain on Europe’s economic resilience.

Von der Leyen’s political and economic confusion

As much as I wasn’t eagerly waiting for the State of the Union speech to see what would be delivered, what’s been said from an economic point of view reinforced my belief that what will be delivered is purely nonsense. It will continue strangling Europeans’ personal budgets during periods of economic sluggishness. Obviously, the rest of the speech was the usual rhetoric that has characterised the past six years. We have another two and a half years left with her at the helm, unless political developments change the course. In truth, I am not comfortable with von der Leyen’s economic narrative, and we truly need to see and dig deeper into what this truly means. When I listen to such a bizarre economic narrative, I pause and wonder who is behind the speeches and the policies. If it is von der Leyen herself, then someone must tell her that she is approaching a Marxian ideology. Nobody should meddle with European citizens’ savings. And it’s up to them to see how to invest it. The EU is indeed approaching a difficult moment.

However, I forecast this back in 2022 when I said that if EU citizens do not have food on the table, far right and fringe parties will grow. We cannot take this with complacency any longer. Look at what is happening in Germany. It gives me chills to listen to Alice Weidel from Alternative for Germany. The narrative against migrants is just chilling. When I wrote about this a few years back, it was ill-timed and ahead of time. Now, we can see for ourselves what this truly means.

European savings are private, not public

We cannot allow a situation where we have politicians like von der Leyen at the helm, making decisions that may inadvertently fuel the far right with the wrong policies. If Ursula von der Leyen wants Europeans to invest their money truly, she must have a little word with Christine Lagarde and see how markets can be better deregulated, how costs can be harmonised across the EU, because the cost of capital to invest is still quite expensive relative to the US, and then come to us to allow our money to be used for additional projects. Ursula von der Leyen’s policies have placed Europe in a challenging position. Now we need to find a way out of this situation, and surely, we need leadership capable of delivering that outcome.

As John Maynard Keynes put it, “In the long run, we are all dead.”