[ad_1]
Last week, the European and world economy were surprised by the news of the record drop in Euribor, the interest rate at which a group of selected European banks lend money to each other.
Photo: Beta / Milan ObradovićThat rate has been falling for several days and today it is between -0.3 and -0.5 percent, depending on the term of the loan.
This is a sign that the markets expect a fall in prices, that is, deflation, despite the policy of unprecedented issuance of fresh money that the European Central Bank (ECB) has implemented since the beginning of the crisis caused by the corona virus, writes Marko Obradović on the blog of the Center for European Policies.
The fall in European interest rates also affects the price of loans in Serbia. The reduction of the Euribor generally has a positive effect on all debtors, especially if, as is the case with the majority of debtors in Serbia, they have entered into credit agreements with banks in which the interest rate of the borrowed funds is expressed as the sum of the bank’s margins and Euribor.
The lower the margin or Euribor, the lower the interest paid by the debtor. When the Euribor “slides” into the negative zone, the interest paid by the debtor becomes even lower than the bank’s basic margin.
The direct consequence of the fall of the Euribor is that the majority of the debtors will pay lower monthly installments in the next period. In theory, it is possible for the Euribor to fall so much that it is below the bank’s margin level, which means that the bank would pay you every month for the loan you took.
However, although in the short term it is more favorable for debtors, the departure of the Euribor to the negative zone means that something is very wrong with economic flows.
Deflation generally motivates market participants to postpone purchases, with the expectation that the goods or services will be even cheaper. Such behavior further affects the reduction in economic activity and investment, and then the reduction in employment, causing a spiral of negative effects on the economy.
The good side of reducing the Euribor should be the motivation for new loans and investments that would not be profitable or economically justified at higher interest rates. Therefore, those projects with lower expected benefits under conditions of lower interest rates, become economically possible.
Unfortunately, the reasons for delaying investment today are not due to economic factors, but to health factors that limit business; the market is strongly influenced by non-economic factors. It is very likely that in the next period the ECB will continue with its monetary expansion policy to somehow stimulate economic activity.
The negative price of money, therefore, although in the short term it seems to facilitate business and reduce the burden on debtors, is not a desirable phenomenon but a consequence of the great problems facing the economies of Europe and the world.
In the long term, keeping the Euribor in the negative zone would represent an extremely deep crisis with profound and devastating social consequences. The hope remains that the economic crisis caused by the coronavirus will not last long and that the recovery of economic activity and investment in the euro zone and its trading partners will be strong and rapid.
The author is associate of the CPA and coordinator of the Working Group of the National Convention on the European Union, which oversees the negotiations on the accession of Serbia to the EU in Chapters 4 and 9.
Support us by being a member of the Danas Readers Club
In the age of widespread tabloidization, sensationalism, and media commercialization, we have been insisting on the principles of professional and ethical journalism for more than two decades. We were banned and called, no government was kind to criticism, but nothing prevented us from informing you objectively on a daily basis. That is why we want to trust you.
Membership in the Danas Book Club for 799 dinars per month you help us stay independent and consistent with the journalism we believe in, and you receive a PDF of tomorrow’s issue of Danas via email every night.
Related texts:
