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Since the pandemic first struck, sovereign debt stockpiles have soared. The IMF said last month that public debt globally had now hit $100tn, and was set to rise further in the years ahead.
While Eurozone member states have already cut back on spending more than the UK, US and China, the region’s debt-to-GDP ratio is up from 83.6 per cent in 2019 to 88.7 per cent at the beginning of 2024. Deficits in some of the largest economies — including France — have also expanded.
After suspending EU fiscal rules at the onset of the pandemic, Brussels reinstated them this year. The result has been a tightening in fiscal conditions that is set to continue in the years ahead.
So far, 21 member states have submitted plans on how they intend to rein in spending over the next four to seven years.
Among the most closely watched is a proposal from new French prime minister Michel Barnier that would shrink the deficit in the EU’s second-largest economy to within the 3 per cent ceiling by 2029.
Spain and Italy both plan to meet the threshold earlier, in 2024 and 2026 respectively. While Spain’s target seems attainable, thanks to one of the strongest growth rates in Europe, economists view Italy’s plans as ambitious.
Both France and Spain have helped bolster regional growth in 2024 at a time when the German economy has stagnated.
Political chaos in Berlin has meant it is yet to present its spending plans to Brussels. The region’s largest economy has more fiscal space than other EU member states, with its deficit set to reach just 1.6 per cent of GDP this year — well within the 3 per cent limit.
With interest rates still relatively high, Zettelmeyer noted that monetary policy could provide a temporary boost. “The ECB has enough firepower to offset the fiscal drag,” he said.
While rate cuts would boost growth, such a solution is “not ideal,” said Posen.
Lower rates and expenditure cuts combined would widen inequality — tighter fiscal policy usually affects poor people more, while looser monetary policy benefits asset holders first — and leave the ECB in a tough spot, should inflation return, Posen said.
Data visualisation by Janina Conboye
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Publish date : 2024-11-13 21:00:00
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