ECB's Villeroy
It is astonishing that in 2027, seven years after the pandemic emergency, governments are still violating eurozone budget deficit regulations. This clearly cannot end well.
I think a long-term analysis would suggest that the optimal path for politicians looking to win the next election is to spend more, in part because the stability of the euro will delay the effect, but at some point this becomes a collective action problem because no one wants to enforce the 3% deficit rule.
Moreover, it all falls apart when the Merkel/Sarkozy-type eurozone “consensus” is challenged by a populist wave, which sees this as an existential crisis and further relaxes budget deficit standards in order to maintain the status quo.
In the end, the markets will do what they always do with European countries that spend too much, and the currency will be destroyed.
Anyway, more from Villeroy:
- Most of the deficit reduction efforts should come from spending cuts, but targeted tax increases are also needed.
- Taking five years to reach 3% would be more in line with EU rules
- GDP growth rate for 2025 is forecast to be 1.2%, unchanged from the previous forecast.
- GDP growth rate in 2026 is expected to be 1.5% (previous forecast: 1.6%)
- HICP inflation still forecast at 2.5% in 2024
- HICP inflation rate forecast at 1.5% in 2025 vs. 1.7%
This last figure is truly shocking and I cannot understand why the ECB is not signalling an earlier rate cut.
