Eurozone raises interest rates for the first time in 11 years

In a bid to control rising inflation, the European Central Bank (ECB) has increased its interest rate for the first time in just over a decade. This move follows other central banks in hiking their base interest rate to tackle inflation, including the Bank of England and the US Federal Reserve. But does the ECB’s rate increase put highly indebted countries at risk?

ECB increases interest rate to 0.0%

The European Central Bank set a negative interest rate in 2014 to boost weak economic growth. The negative interest rate remained in place until just recently when it was increased by 0.5 percentage points to bring the rate back to 0.0%.

Data revealed that consumer prices have increased by 8.6% in the previous 12 months, which is well above an inflation target of 2%. Rising energy and fuel costs have significantly contributed to soaring inflation, and so has the Russian invasion of Ukraine. Therefore, the ECB has taken action to increase its interest rate – and more increases might follow.

The Eurozone is especially vulnerable to the events taking place in Ukraine. Much of the Eurozone relies on Russian gas and oil. If Russia decides to stop supply, the cost of energy could increase much further. This is why EU member states have already been told to start rationing current supplies.

Concerns about higher borrowing

Despite efforts to cool inflation rates, some experts remain worried that increasing borrowing costs (e.g., interest rates) will negatively affect European nations that are highly indented, such as Greece and Italy.  

The younger population in Greece have lived through long periods of uncertainty and crisis. Many work multiple jobs to make ends meet or to put themselves through college and university. The COVID pandemic and now soaring inflation rates are just the latest problems to their list, making it harder than ever to live comfortably.

The fallout is that many highly trained and skilled workers have chosen to leave Greece and look for opportunities overseas. London School of Economics (LSE) estimates that 400,000 Greeks with a degree have left the country since 2010 in a trend known as “brain drain”.

But the future may not be as bleak as some would predict. The country’s economy is set for a boost, especially with tourism back in the country. This industry alone makes up around 25% of the Greek economy, so getting tourism back in full swing will be an important boost. Moreover, youth unemployment may be the highest in the Eurozone at just over 36%, but it’s considerably less than what it was in the eye of the Greek debt storm in 2013 (58.2%).

Greece’s deputy finance minister is confident that the country won’t fall into a recession. But the big question is, will the younger generations and the most skilled workers stick around in time?

August 2022