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