TITLE

Low Base Interest Rates: An Opportunity in the Euro Debt Crisis

AUTHOR(S)
Kokert, Marius; Schäfer, Dorothea; Stephan, Andreas
PUB. DATE
May 2014
SOURCE
DIW Economic Bulletin;2014, Vol. 4 Issue 5, p3
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
Member states of the euro area have been struggling with the legacies of the severe financial and economic crisis for four years now. But debt ratios are still rising. The crisis countries of the euro area were able to "buy time" with bailout packages and low interest rates. But as long as the other influencing factors are not developing more positively, it remains uncertain whether the current stabilization of the euro debt crisis is sustainable. The ECB's low interest rate policy undoubtedly offers some relief in this situation. First, the interest burden for most countries in the euro area has declined in recent years. This effect has tended to stile increases in the debt ratio. Second, low interest rates strengthen the economy. In turn, this increases government tax revenue and improves the primary balance. Low interest rates also played an important role in driving down the debt ratio in the US. Between 1946 and 1953, the US was able to almost halve its debt with no haircuts. However, negative primary balances, low growth, and low inflation do not allow for a recovery similar to the one in the US after World War II. For this reason, low interest rates currently appear to be the only lever in the euro area which could be used to make euro area countries' debt more sustainable. What is essential now is that they seize this opportunity.
ACCESSION #
96848531

 

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