Tuesday, 17 May 2016

The EU countries' economic health barometers

How do you know if a country of the European Union is doing well economically or not? While economists can debate this issue for hours and hours, there's a quite simple way to find out. Via the so-called 'long-term interest rates' of the European Central Bank.

That's quite a mouthful. The European Central Bank is a bank, in the hands of the government. It mangages the Euro, in just a few words. For example, it can allow Belgium to print some Euro's. The ECB's first goal is to make sure that prices for EU goods like spinach, cell phones and tables don't go up too quickly. And not down, otherwise no one would buy them anymore, expecting the prices to go even more down. Actually, the goal is close to 2 percent increase of the general prices per year. Read more about the ECB here.

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As part of their duties, the ECB collects data. It does so for the long-term interest rates of government bonds. Lots of difficult words there. Government bonds are loans the government takes. Some of the bonds anyone can buy. Mostly it's big organisations like pension funds who want to buy these bonds. So they know or at least think their money is safe. In return, they receive the money they loaned plus some interest. And an interest rate, is the rate at which the money was loaned.

Let's illustrate it: Belgium wants to spend 100 Euro for buying some fighter planes. So, they check: who wants to give them a loan? I say: me, of course! I feel like Belgium always pays their debts. I conclude the deal, Belgium gets a 1-year loan and will pay me back 102 Euro in a year. So the bond is from Belgium, the interest rate is 2% and the interest is 2 Euro.

Well, that's a little simple, but it's basically it. Now, long-term interest rates are those for bonds of around 10 years. So those who loan money will wait for about 10 years to see their money back. Of course, they will only give their money to states that don't go bankrupt. And the more they think the country will go bankrupt, the higher the interest rate.

Let's take the fighter planes again: I (and many others) think Belgium won't be able to repay the 100 Euro, for a period of 10 years. If I think that Belgium will go bankrupt in 5 years, I can give them a loan with 25% interest rate. So after 5 years, I get 125 Euro back. That's 25 Euro interest every year, times 5, is 125.

Conclusion: the higher the interest rate, the worse the governments' ability to repay their debts. The ECB collects monthly interest rates. There, you can easily see in the figures in the table who can get cheaply loans, and who doesn't. So it's a way to tell if an EU country is doing well or not. Germany usually has the lowest rates.