Is Europe repeating the mistakes of the eurozone crisis of the 2010s, by imposing widespread budgetary austerity in the midst of an economic slowdown? On the one hand, the clouds are gathering: the election of Donald Trump announces the imposition of probable customs duties from the United States; Chinese competition fills the Old Continent with goods manufactured with subsidies; domestic growth is almost stagnant, after the inflation shock, and Germany in particular is recording two successive years of economic contraction. On the other hand, the European Union (EU) is choosing this very delicate period to put its budgetary rules back in place. These had been suspended during the Covid-19 pandemic, after having been slightly renegotiated. They have been in effect again since this year.
“The consolidation of public finances comes at a time when the euro zone economy is facing a deterioration in the economic situation and a risk of rising unemployment”underline in a note dated November 7, economists at Danske Bank, a Danish financial institution.
The extent of future budgetary austerity, however, has nothing to do with the time of the eurozone crisis. Based on the budgetary plans submitted to Brussels by the twenty single currency countries, Danske Bank economists calculate that fiscal consolidation for 2025 should amount to around 0.7% of gross domestic product (GDP).
A moderate impact in the euro zone
But this effort only concerns national budgets. At the same time, a European recovery plan, which is counted separately, should partially compensate for this policy. Decided in 2020, established in 2021, Next Generation EU is a common European loan of 750 billion euros. This major political breakthrough has been delayed: less than half of the money has been paid to recipient countries, and even less has actually been spent. This gap should be partially made up in 2025, with spending expected to amount to 0.4% of GDP that same year, according to Danske Bank.
All in all, the budgetary impact for 2025 in the euro zone should therefore be negative but moderate, around 0.3% of GDP. A “modest consolidation”which follows four years of increases in public spending, estimate HSBC economists. This effort should make it possible to increase the public deficit of all twenty countries from 3.2% of GDP this year to 2.7% in 2025.
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Source: Lemonde