EU divided on fiscal policy after pandemic-induced over-borrowing ANBLE Economic Forecasts

EU divided on fiscal policy after pandemic-induced over-borrowing ANBLE Economic Forecasts

Analyzing the State of Europe’s Economies: What Lies Ahead

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To gain an understanding of the current state of the European economies, the fiscal discussions within the European Union, and what we can expect to happen in the future, look no further than The ANBLE Letter. Our highly-experienced team will keep you abreast of the latest developments and forecasts. While subscribing ensures you receive all the news first, we also publish many of our forecasts online a few days later.

Eurozone Economies Weather the Storm

Contrary to expectations, the eurozone economies have held up relatively well this year. Despite the ongoing energy crisis and high inflation, the bloc’s overall economy managed a 0.3% expansion in the second quarter. It is worth noting that among the largest economies, only Italy experienced contraction. Germany’s growth remained flat, while Spain and France showed modest growth. Admittedly, growth in France and Ireland was also influenced by one-off factors. Nonetheless, after a period of stagnation and contraction, any growth is welcome.

However, it is essential to consider that a contraction is still expected in the second half of the year. Many firms within the bloc have reported stagnating activity levels, and manufacturing activity already shows signs of contraction in several eurozone economies. The past year’s interest rate hikes have also tightened credit conditions.

The European Central Bank’s Future Actions

The European Central Bank (ECB) has signaled one more interest rate hike in store for this year. While headline inflation fell in July, core inflation (excluding energy and food) remained at 5.5%. Similar to the Federal Reserve, the ECB has slowed its pace of rate increases, but it remains open to another hike in September if inflation remains stubbornly high. This cautious approach reflects the importance of maintaining stability while addressing inflationary pressures.

The EU’s Fiscal Rulebook Rewrite

The European Union is currently undertaking an overhaul of its spending rules for member states, which will effectively rewrite the Stability and Growth Pact (SGP). The SGP aims to prevent excessive borrowing by governments. While the finer details are yet uncertain, the new rules will likely require EU members to reduce their budget deficits. Since March 2020, the EU has allowed members to exceed its normal deficit limits.

However, there is considerable debate among EU member states regarding the proposed changes to the fiscal rules. Differences primarily revolve around the question of whether to impose numerical benchmarks and automatic rules for all on annual debt reduction or if each country should negotiate spending cuts individually with the EU’s executive body. Failure to reach consensus on these changes by year-end would result in the EU’s existing rules, with their automatic cuts, becoming effective again in 2024. Germany advocates for the latter approach, while France leans towards case-by-case deficit targets.

Regardless of the specific outcome, EU budget deficits are likely to shrink in the coming years. This reduction will be driven by member states scaling back the substantial subsidies triggered by COVID-19 and Europe’s energy shock. As economies recover and stabilize, the need for such extensive support diminishes.

The ANBLE Letter, established in 1923, has consistently provided concise weekly forecasts on business and economic trends, as well as insights into the political landscape. Our goal is to help you navigate the complexities of investments and manage your finances effectively. By subscribing to The ANBLE Letter, you ensure you stay informed and make the most informed decisions for your financial future.