Blog post

Chart of the week: Real interest divergence weighs on growth

The real interest rate divergence in the Euro Area has recently generated new attention. Real interest rates fell quite substantially in the cris

Publishing date: 24 October 2014
Authors: Guntram B. Wolff Noah Garcia

The real interest rate divergence in the Euro Area has recently generated new attention. Real interest rates fell quite substantially in the crisis up to the end of 2011, but have been rising since then (see graph). However, there have been substantial differences across countries, which can be explained by differences in nominal interest rates as well as by diverging inflation rates.

Source: Datastream ThomsonReuters

Note: Real long term interest rates calculated by subtracting HICP rates (all items) from 10-year maturity sovereign bonds.

The four countries with the highest real interest rates evidently had the lowest real GDP growth over the crisis years

Economic theory would suggest that persistent divergences in such real rates should have had an effect on economic growth performance, and the chart below suggests that indeed is the case. The four countries with the highest real interest rates (Spain, Italy, Ireland, Portugal) evidently had the lowest real GDP growth over the crisis years. Such a simple correlation obviously should not be interpreted as proof of causality, and other factors certainly have played an important role in explaining the lacklustre performance of the four economies. Yet, the fact that real interest rates have also moved into negative territory in Germany and the UK may suggest that lower interest rates facilitate greater opportunities for growth.

Source: Datastream ThomsonReuters

Note: Average monthly real interest rate calculated with same HICP data as above subtracted by 2-year treasury bond yield data. Both indicators measured a percentages.

Special thanks to Pia Hüttl for her contributions.

About the authors

Guntram B. Wolff

Guntram Wolff was the Director of Bruegel. Over his career, he has contributed to research on European political economy and governance, fiscal, monetary and financial policy, climate change and geoeconomics. Under his leadership, Bruegel has been regularly ranked among the top global think tanks and has grown in influence and impact with a team of now almost 40 recognized scholars and around 65 total staff. Bruegel is also recognized for its outstanding transparency.

A recognized thought leader and academic, he regularly testifies at the European Finance Ministers' ECOFIN meeting, the European Parliament, the German Parliament (Bundestag) and the French Parliament (Assemblée Nationale). From 2012-16, he was a member of the French prime minister's Conseil d'Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed to the G20 high level independent panel on pandemic prevention, preparedness and response. He is also a professor (part-time) at the Solvay Brussels School of Université Libre de Bruxelles, where he teaches economics of European integration.

He joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he was coordinating the research team on fiscal policy at Deutsche Bundesbank. He also worked as an external adviser to the International Monetary Fund.

He holds a PhD in economics from the University of Bonn and studied in Bonn, Toulouse, Pittsburgh and Passau. He taught economics at the University of Pittsburgh and at Université libre de Bruxelles. He has published numerous papers in leading academic journals. His columns and policy work are published and cited in leading international media and policy outlets. Guntram is fluent in German, English, French and has good notions of Bulgarian and Spanish.
Noah Garcia