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Economists say a decline in public spending is expected to dampen eurozone economic growth next year as the eurozone moves into an era of fiscal restraint, putting pressure on rate-setters to ease monetary policy.
EU finance ministers this week agreed new fiscal rules to replace strict but difficult-to-enforce budget constraints that have been suspended since the pandemic began in 2020.
The measures agreed with Brussels will gradually tighten spending controls, forcing highly indebted countries to come up with plans to reduce their debts and deficits and set annual spending caps.
Lucrezia Reichlin, a professor at London Business School and former director of research at the European Central Bank, said the new rules “remain restrictive and are bad news for highly indebted countries like Italy.” Stated.
Meanwhile, the German government has only agreed to next year's budget with spending cuts, some tax cuts scrapped and asset sales after Germany's Constitutional Court left a 60 billion euro hole in its spending plans.
Economists expect a shock end to nearly three years of fiscal support in the region as a return to more limited government spending further weighs on weak demand and economic activity. The eurozone economy shrank by 0.1% in the third quarter after being stagnant for much of this year.
Jack Allen Reynolds, an economist at consultancy Capital Economics, said the new EU rules would be “tougher” by requiring highly indebted countries like Italy to reduce their budget deficits faster, but would He said it would allow for “more generous” debt reductions. Level up more slowly.
This shift would be a return to the pre-pandemic situation, when the ECB had to shoulder most of the burden of stimulus and had to resort to negative interest rates and large-scale bond purchases to avoid deflation. Some are even concerned that this may be the case.
The ECB this month brought forward the expected date for countries to scrap support measures introduced to combat recent spikes in energy and food prices, and predicted a sharp tightening of the single currency bloc's fiscal stance in 2024. I expected it.
The central bank predicted that the budget deficit across euro zone countries would shrink from 3.1% this year to 2.8% next year. This contrasts with the far more expansionary stance of the United States, where the IMF predicts a budget deficit of 8.2% this year and 7.4% next year.
Konstantin Veit, a portfolio manager at investment firm Pimco, said the ECB could struggle to stimulate economic activity. “We may once again find ourselves in a situation where monetary policy ends up promoting economic activity.” string. “
Economists have lowered their forecast for eurozone growth in 2024 to just under 0.5% from 1.2% at the start of the year, according to Consensus Economics. Last week, the ECB lowered its growth forecast for 2024 to 0.8% from 1%.
The average forecast for Germany's growth rate next year has fallen to less than 0.4% from almost 1.4% at the start of the year. T. Rowe Price's Tomasz Wierardek said last month's court ruling prompted many economists to revise their forecasts downward, resulting in a “fiscal drag” of between 20 billion and 30 billion euros next year for the EU's biggest economy. said that it would occur.
Economist Martin Volburg from Generali Investments recently lowered his forecast for Germany's growth next year to just 0.1%, saying the country's “fiscal crisis will have a negative impact on the economy, primarily through a hit to confidence.” he warned. He added that curbing growth in the euro area would “slightly increase the ECB's appetite to cut interest rates.”
Paschal Donohoe, chairman of the Eurogroup of finance ministers, told reporters this month that the EU's new rules “will definitely have an impact on the euro area's fiscal stance”, adding that it will be “restrictive” in 2024. He said that.
