Daily Brief – Fiscal handbrake

Charles Porter
Thu 20 Jun 2024

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

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