A little over 4 years ago, in February 2016, we saw a negative Euribor for the first time in history. For those who do not know it, the Euribor is the average interest rate at which the big banks in the euro area lend money. That is, if the interest is negative, the provision of that money carries a lower nominal amount than the amount initially given. Is this something profitable? No, logic tells us that we would not give money in exchange for less than the borrowed one. And that's the question, how this came to be.
In this article we will talk about why the Euribor is negative. The advantages in the search for the reactivation of the economy, and how this illogical technique that goes against the current is necessary.
Looking a bit to the past
Before the financial crisis broke out the Euribor reached 5'393%, this was in 2008. Once this maximum peak was reached, an accelerated decline in interest rates began. A year later, in 2009, we could see a Euribor at approximately 1%, it rose somewhat later, but in 30 it fell 2012% for the first time. 1 years later, in 4, we saw the Euribor in negative for the first time. Many savers will remember those years. People who were used to giving profitability to their savings through bank deposits, for the first time they were offering almost no profitability (around 2016%).
The entire financial crisis that was hit hard after the Lehman Brothers crash had to be paid for. Central banks began issuing money and lending it to banks in their areas. Credit had to flow, money had to move, and companies and families had to be made to ask for money again.
Who decides that the negative Euribor continues and for what reason?
It is about the interest that is marked by the European Central Bank by lending money to banks. One of the purposes, as previously mentioned, is to get credit and money to flow, that is, to encourage consumption. This fluidity is conditioned by the objective of gradually increasing inflation. Despite the fact that monetary policies to raise inflation have been in place for years, they have not yet been achieved. Falls in raw materials such as oil or other international export products, together with lower consumption that "pushes" prices down, prevents inflation from rising. In a moderate way, it could be said that it is healthy, very high is detrimental to the economy. In the same way that negative inflation, that is, deflation, is also bad for the economy.
Due to the recession, families began to save more, as the economy was slowing down. An increase in unemployment and the difficulty in accessing credit accentuated the crisis. However, if to reactivate the economy you had to consume and what people did was save more because they were in recession, it created a vicious circle. This paradox led to less money flowing, and for this reason began to encourage borrowing by lowering interest rates, that is, lowering the price of lending money. For this reason, increasing the interest rate is something that, although it is expected, cannot be done. It would discourage credit applications, and therefore, consumption could be affected.
Advantages and Disadvantages of a Negative Euribor
The idea of stimulating consumption based on monetary policies has two faces. Understanding how a negative Euribor affects not only will help you understand more about the economic situation in the Eurozone, but also your personal finances.
Among its advantages are, on average, being able to access a home loan at a lower interest rate. If the mortgage is at a variable rate, it is usually more noticeable when the Euribor falls, since it is possible to pay less, which translates into savings for the pockets. For fixed mortgages, which are not few and it is normal in view of the fear of paying high interest, the fluctuations of the Euribor are not usually noticed. By having a greater capacity to save, families can have more resources to consume, which encourages an enrichment on the part of companies. In this way, this entire cycle is closed, and ends up benefiting us all.
Among its disadvantages is mainly that the price of money is low, that is, it is favors consumption to the detriment of saving. The alternatives of where to place and increase the capital are also diminished. The negative Euribor is a solution for the short or medium term, but not for the long term.
A curious fact is that many savers decide to invest and put their money to work, some in the stock market, others creating new businesses ... I do not know if this is an advantage or a disadvantage, because when knowledge about it is low, it is not usually have good results. However, it also motivates and has taught better and new paths to people who would not have sought them before.
Future prospects for Euribor
Before there was a pandemic, future forecasts could not always be correct, but they were certainly tighter than in the current environment. The current economic outlook is a bit like the economy, that is, turned upside down. With the widespread confinements suffered this March 2020, we saw the Euribor hit historic lows, so that then in less than a month it had a substantial comeback (still in negative territory). In the following months and up to the present, it continues to decline, but more slowly.
It is expected that for this year and at least the next, the Euribor will continue in negative territory. Around -0% for 25 and -2020% for 0. However, all this could be altered, depending on the economic impacts of the pandemic, the responses that are given politically, and of course, on how the European Central Bank decides to face the different future scenarios. In the end, the ultimate power and authority to decide whether to raise or lower the Euribor belongs to the ECB.