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9 Dec 2015
Heading towards the end of Eurozone austerity - HSBC
FXStreet (Delhi) – Fabio Balboni, European Economist at HSBC, suggests that with the weak global environment still weighing on exports and investment, the Eurozone hardly needs more austerity.
Key Quotes
“For eurozone governments, QE has been a gift. Bond yields have collapsed. We estimate QE has taken 275bps off Portugal 10yr yields versus Germany, 135bps off Italy, 120bps off Spain, and 25bps off France. This has been a windfall gain. Interest payments in 2015 were almost 25% lower in the eurozone than expected a year ago.”
“Governments are certainly spending their gains, and will spend even more next year. For 2016, we estimate a net fiscal expansion of 2.3% of GDP in Italy, and 0.9% of GDP in France compared to last year’s plans. In Germany, government spending is set to increase by close to 4% next year in real terms. QE therefore seems to have ended the debilitating cycle of austerity, lower growth and the need for more austerity, particularly for the most indebted countries.”
“The European Commission has been turning a blind eye to fiscal misdemeanours. If all the rules were strictly enforced, only Germany would be 'compliant'. But with ‘mitigating’ factors, such as asylum applicants and threats of terrorism, not to mention the rise of anti-European political parties, Brussels has put its penalties away for now. Is this good news? Is this what the eurozone needs to get the recovery entrenched? Or is it a return to the fiscal profligacy that was the very root of the sovereign crisis?”
“The fiscal/monetary policy mix so far has actually been more favourable than in the UK, US, or Japan, during their QE periods. Debt sustainability is looking better. It is also welcome that, for once, a good chunk of the increased spending is in Germany.”
“However, we need to keep a close eye on exactly how the money is spent. We want to see spending that will spur private sector activity and business investment. Instead, in an environment where incumbent governments are not riding high in the polls, they have chosen to boost current spending at the expense of investment.”
“Moreover, as the public sector keeps growing and there are clear signs of tax exhaustion, it will likely be very difficult to ever close the gap. Little help is coming from the eurozone as a whole in terms of raising domestic demand. Government debts in countries like Spain, France and Italy are likely to climb higher and the shadows of the sovereign crisis will continue to loom, leaving these countries vulnerable to a change in ECB policy.”
Key Quotes
“For eurozone governments, QE has been a gift. Bond yields have collapsed. We estimate QE has taken 275bps off Portugal 10yr yields versus Germany, 135bps off Italy, 120bps off Spain, and 25bps off France. This has been a windfall gain. Interest payments in 2015 were almost 25% lower in the eurozone than expected a year ago.”
“Governments are certainly spending their gains, and will spend even more next year. For 2016, we estimate a net fiscal expansion of 2.3% of GDP in Italy, and 0.9% of GDP in France compared to last year’s plans. In Germany, government spending is set to increase by close to 4% next year in real terms. QE therefore seems to have ended the debilitating cycle of austerity, lower growth and the need for more austerity, particularly for the most indebted countries.”
“The European Commission has been turning a blind eye to fiscal misdemeanours. If all the rules were strictly enforced, only Germany would be 'compliant'. But with ‘mitigating’ factors, such as asylum applicants and threats of terrorism, not to mention the rise of anti-European political parties, Brussels has put its penalties away for now. Is this good news? Is this what the eurozone needs to get the recovery entrenched? Or is it a return to the fiscal profligacy that was the very root of the sovereign crisis?”
“The fiscal/monetary policy mix so far has actually been more favourable than in the UK, US, or Japan, during their QE periods. Debt sustainability is looking better. It is also welcome that, for once, a good chunk of the increased spending is in Germany.”
“However, we need to keep a close eye on exactly how the money is spent. We want to see spending that will spur private sector activity and business investment. Instead, in an environment where incumbent governments are not riding high in the polls, they have chosen to boost current spending at the expense of investment.”
“Moreover, as the public sector keeps growing and there are clear signs of tax exhaustion, it will likely be very difficult to ever close the gap. Little help is coming from the eurozone as a whole in terms of raising domestic demand. Government debts in countries like Spain, France and Italy are likely to climb higher and the shadows of the sovereign crisis will continue to loom, leaving these countries vulnerable to a change in ECB policy.”