Although interest rate hikes appear to be peaking in the EU, the southern member states of the Eurozone should expect a lot of pain in the coming years. More specifically, last year’s ECB interest rate hikes are expected to have a greater impact on southern than northern eurozone countries in 2024. And given that asset prices and investment in the South have outperformed the North, the rapid decline in borrowing due to a rise in the cost of money suggests that this is about to change – mainly because both public and private debt is rising rapidly. In this context it is worth pointing out that, although the expectations were that Southern European countries would face significant problems if the European Central Bank aggressively raised interest rates, this did not materialize. In fact, the opposite seems to be the case: Several indicators show a stronger transmission of tighter monetary policy in Northern rather than Southern European countries. Take the stock markets, where key European indices underperformed in the North compared to the South. The Euro Stoxx 50 began to decline in December 2021 as long-term bond yields began to rise globally. Since then, Germany’s and France’s main indexes are up 5%, and the Dutch AEX is down 1.4%. On the other hand, in Spain, Italy, Greece and Portugal the main indicators have recorded an increase of 16%, 11%, 45% and 15%, respectively. Price developments in the housing market also show a greater impact in Northern Europe. Germany, the Netherlands and France have seen house prices fall below their recent highs, while Italy, Spain, Portugal and Greece are still seeing price growth, according to the latest available data. Investment growth in Southern European countries is remarkable, despite high interest rates. Consider the impact of the Recovery and Resilience Fund and possibly the lagged impact of low interest rates and the search for yield, as well as successful structural reforms. However, investment in southern European countries has grown by around 15% since the end of 2020, while investment in core euro countries has grown by less than 5% over the same period.
The differences in transmission are starting to show
The pain of monetary tightening is likely to be more felt in 2024 than last year because of the long and volatile legs of monetary policy transmission. It just takes some time before the impact of tightening really affects the economy.
There is growing evidence that monetary policy transmission in 2024 will be less favorable for southern European countries in general. A relevant indication is the most recent lending data. Lending volumes are currently falling in most Southern European economies.
- In Italy, the situation looks very serious, with the 6% fall in lending from non-financial businesses worse than during the global financial crisis and the euro crisis.
- Spain, Portugal and Italy are seeing declining borrowing volumes for both households and businesses.
- On the other hand, Northern European economies continue to see borrowing increase year-on-year.
- Belgium and France are doing particularly well among the largest markets, while Germany and the Netherlands are seeing stagnation.
Differences in lending do not come from differences in bank interest rates for new loans, as they do not diverge materially. However, while corporate loan rates do not differ significantly between eurozone countries, mortgage rates do. In countries with more variable mortgage rates, average mortgage rates have risen almost in line with new loan rates.
- In the Netherlands and Germany, where fixed-rate mortgages are the norm, average mortgage rates have risen little so far.
- In the Netherlands, they rose from 2.3 to 2.5%.
- In France, they rose from 0.8 to 4%.
Deleverage
The impact of higher mortgage charges could play through adjustments in the housing market – transactions are already down in Spain by 15% year-on-year in November. They could also lead to impaired consumption.
And there is another transmission channel through which higher mortgage rates will affect economies: mortgage foreclosures have increased significantly in Italy and Spain since rates began to rise. This essentially means that higher interest rates have started a process of household deleveraging in the South, which will weigh on consumption and economic activity.
