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The current increases in Interest Rates are a Particular Burden on Young People

  • Rush
    Rush Vermögenstracker e.U.

As has been shown many times in the past, interest rate increases are often accompanied by a loss of wealth. One section of society that is particularly affected by this are young adults. They may not have had the chance to build up wealth yet, and interest rate increases make this step so much more difficult. But more on that in a bit.

Why are there increases in interest rates?

One of the ECB's tasks is to ensure price stability. If the situation arises that prices are generally rising, it is basically their job to take countermeasures to prevent inflation. By raising interest rates accordingly, demand on the markets is curbed. If interest rates rise, fewer loans are granted automatically. Both companies and private households therefore spend less money. The number of orders at companies decreases, fewer employees are needed, and unemployment rises. Due to a higher supply of potential employees, it is more difficult for them to make salary demands. And despite rising prices in general, wages are stagnating. In theory, this should result in businesses not raising prices any further or doing so less.

So far, so good. Apart from the fact that this forecast does not sound particularly bright in general, it has major implications in many areas. 

Interest rate hikes have different effects on the labor market

According to the ECB's own explanations, far more workers between the ages of 25 and 54 are in fixed-term employment than workers between 55 and 64. If stricter monetary policy reduces demand, companies are forced to take appropriate action and consequently this is more likely to affect workers with fixed-term contracts, as these will not be renewed. These developments can then have far-reaching consequences for future working lives. For example, it is statistically more likely to become unemployed later if this has already occurred at a young age. After an involuntary job loss, an income loss of 5-20% can be expected in the following years. At this point, however, the social and societal changes that this unemployment entails have not yet been addressed. Accordingly, interest rate increases not only have short-term consequences, but can also have a major impact on each individual in the long term.

States will also have to face consequences

Both internally and externally, decisions made by states with regard to their investment behavior will have widespread consequences. If it is more costly for states to borrow money, the incentive decreases. Conversely, less money is likely to be spent on infrastructure and public services. And it is precisely people with small and medium incomes, i.e. often young people, who are particularly dependent on education and public services.

After the past three to four years, a global health crisis and the war in Ukraine, many economies are facing major problems. Governments are also seeing loans become more expensive as a result of interest rate hikes. In addition to the aforementioned curbed domestic investment, the tension within the Eurozone is likely to intensify.

What does all this mean for our young adults?

In addition to the general uncertainty socially, politically and financially that is being felt time and again at the moment, the measures for young people mean that the risk of becoming unemployed has increased enormously. Likewise, it is currently rather unlikely that a young person will be able to afford a home of his or her own, either because of the increased costs in general or because of the increased interest rates. If a loan has already been taken out in the past, but a variable interest rate has been agreed, this can present a huge financial challenge, especially at an age when one may not yet have been able to build up financial reserves. Education and other government spending on young adults is likely to be drastically cut back. All of these influences create short-term destabilization in the daily lives of these people, most of which also affect their social environment. In addition, these effects can have very unpleasant consequences for the future.

Despite the many critical points, it is nevertheless not possible to present an alternative solution so easily. At the moment, every decision in this area involves major and sometimes unmanageable risks for many different groups in society.