Fiscal handbrake
France, Belgium, Italy, Hungary, Malta, Poland and Slovakia. All of these countries were identified by the European Commission’s report as having broken fiscal deficit rules. As a result, each of these countries are now subject to excessive deficit procedures. With so many nations having fallen foul of the Union’s standards for fiscal sustainability, it is hard to say that those member states listed above have been ‘singled out’. With so many member states with their budgets now under the magnifying glass, the excessive deficit procedures will present a risk to the Union in how it deals with these problems, not just the member states concerned.
The excessive deficit procedure largely involves the Commission presenting fiscal reform proposals to the member state under review. Due to the elections to take place shortly, it is France’s inclusion within this list that creates the biggest risk. Spending has risen sharply under the current government. However, the electoral pledges made by the opposing National Rally would raise the fiscal deficit significantly faster. The key risk to markets from yesterday’s publication is its propensity to upset French electoral, growth and fiscal outcomes.
The Commission suspended the use of excessive deficit procedures during the Covid pandemic. The reintroduction of the protocol has been motivated by the perceived need to deal with higher debt levels brought in by national fiscal responses to the pandemic. The subjects of the excessive deficit procedure were widely foreshadowed. The Euro and domestic assets were therefore able to accommodate the publication without inducing significant volatility. However, there will be a good case to be made that European debt spreads may rise as a result of the process/outcome of an excessive deficit procedure. This in turn could spill over into the Euro.
Discussion and Analysis by Charles Porter
Bank of England As expected the BoE cut interest rates by 25bps yesterday. So far so good but then the BoE departed from the script. Flat economic growth up until the end of 2024 was less of a surprise but then a new forecast for inflation +3.7% and 2025 economic growth slashed from 1.5% to […]
Not another headline Markets have either grown complacent or are reading beyond Trump’s headline statements. Over the past week markets have been presented with the challenge of fresh tariffs on China with retaliatory tariffs on the US also due to come into force in just under a week. In addition to that they have the […]
German Election With just 18 days to go to the German election, tensions are building. The centre right CDU whose leader Friedrich Merz is likely to be the next Chancellor is under fire for proposing a tougher immigration policy. That says his critics is similar to the far right AFD and verboten given the antipathy […]