Real Interest Rates and Growth – Euro Area 2009 – 2013

An interesting chart has been published on Bruegel’s blog (Bruegel is a Think Tank from Belgium see http://www.bruegel.org ). On one side of this chart there are real interest rates for Euro Area countries from 2009 to 2013 and on the other average growth numbers for the same countries on the same period. Spontaneously there is no causality but we see that on the period high real interest rates are associated with low growth performances. That’s a reason for Mario Draghi try to reduce fragmentation on financial market.
There is no causality measured by the chart but economic theory says that too high real interest rates are a constraint on demand and then a drag on economic growth.
With lower inflation rates in many Euro Area countries, real interest rates will be following a higher trend than what was seen from 2009 to 2013 and this could have a negative impact on growth. That’s why the ECB mustn’t be complacent with too low inflation rate and have to fight to converge rapidly to its 2% target. This would lower real interest rates and could improve the growth momentum.
Bruegel-RTEmagicC_140715_rir2Source Bruegel – http://www.bruegel.org/nc/blog/detail/article/1387-chart-of-the-week-real-interest-divergence-weighs-on-growth/

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