European economies and risk: an international comparison of interest rates for long-term government bonds among the EU

Abstract

In case taxation income does not suffice to finance all projects, governments are issuing bonds in order to raise money and to finance their day-to-day business. Interest rates for long-term government bonds differ within the European Union. Some member states are suffering from very high interest burden, while others are able to finance them for a relatively cheap price. A different risk term for every member state explains these discrepancies. The European Commission tries to frame member states by implementing criteria in European legislation. Unfortunately, the European Commission failed to implement automatic sanctions early. This has changed in the aftermath of the financial crisis in 2008. Nevertheless, for different reasons, no harmonisation of interest rates reflecting a country's risk can be observed. After a short description of various concepts, a statistical analysis identifies some macroeconomic indicators fro, of a broad data panel that have a significant impact on interest rates. Economic, social and political indicators are taken into account by establishing the scorecard. A linear regression points out the significant impact of the GDP, its growth rate and its breakdown per capita, besides the effect of inflation, the wage cost development, public consumption, the government's budget deficit and a country's debt-to-GDP ratio. These results allow interesting conclusions regarding different economic situations a country can find itself in. Most impacts on the long-term interest rate were recorded for the inflation rate and the GDP growth rate, followed by the wage cost development and public consumption. Except inflation, those indicators showed a negative correlation with the variable to explain. In the end, a few recommendations aim to improve European legislation in order to get a better approximation of long-term interest rates. This would give a better overview of a country’s risk among the European Union member states and would enable the European Commission to give support and tailor-made solutions to all member states.