A report published by the aforementioned Canadian analysis house after the last ECB meeting on October 17 brought to the present an issue that already resonated strongly in the past. Savary himself published a note after the third rate cut by the Eurobank in which he left a particularly striking paragraph: “The ECB usually sets policies to help the weaker member of monetary union. We saw this at the start of the millennium, when Germany’s weakness pushed ECB interest rates down, and after the global financial crisis, when the debt problems of peripheral economies made even,” said this expert. Savary continued: “Germany is once again the “sick man of Europe.” The economy is essentially in recession, a situation that won’t change anytime soon. In response to Germany’s problems, the ECB should maintain the benchmark interest rate below levels that would be justified in Spain, Ireland or Italy“, he stressed.
The reference to Spain and the mention of what happened at the turn of the millennium were more than enough to contact Savary and try to find out what is happening and what are the risks that the Spanish economy faces if the BCE continues to ensure or prioritize health. of the weakest members of the euro zone to the detriment of those with more solid dynamics.
The ECB’s “impossible” mission
At first glance, it seems that the ECB’s mission is impossible, since its monetary policy affects 19 different economies, with different propensities for saving, consumption and investment and whose cycles are once again uncoordinated. The euro zone seems condemned to go from crisis to crisis, weighing on the bloc’s overall growth.
A few very low prices for a long time, they can generate significant imbalances in the Spanish economyas already happened during the period 1999-2007. At the time, Spain was growing above the euro average, the population was increasing thanks to the arrival of immigration, productivity was stagnating and property prices continued to rise.
Inside cycles 1999-2007the low real interest rates in Spain generated a credit bubble which stimulated the economy and reduced the unemployment rate to a minimum, well below the level considered structural unemployment. Cheap credit, driven by low ECB rates, has stimulated the growth of the Spanish economy by fueling sectors such as construction, which are not very productive and non-tradable (housing cannot be exported, while the construction sector construction cannot be converted in an instant). . day to day). The growth of constructiona very labor-intensive sector, has generated hundreds of thousands of low-skilled jobs. Despite the massive influx of immigrants, the unemployment rate has reached around 8%, a figure almost unheard of since the Franco regime. Today the situation is not identical, but it is true that unemployment is decreasing and job creation is focused on profiles similar to those of the first decade of the 2000s, only today, instead of construction, the sector which generates this activity is the hotel and tourism industry.
Extrapolated to the present, the pressure to cut rates to save Germany may show its other face in Spain. And the lower they go, the more flammable the “material” can be. Is it possible for the threat to recur? For Savary, everything depends on the duration of the weakness of Germany and France. “In the short term (low interest rate) is something positive for Spain because it means that the official interest rate is lower than the level required by economic activity in Spain. As a result, this will stimulate the Spanish activity and will cause an increase in the level But in the long term, if Germany’s problems continue, this could lead to greater fragility of the Spanish economy”, warns the strategist, who qualifies that the second extreme is not not the case. his base case scenario, because, he hopes, “Germany should experience a recovery in 2026 that would allow the ECB to normalize interest rates and prevent the emergence of a debt-fueled bubble in Spain.
Spain, towards overheating?
Until these predictions come to fruition or not, the current situation remains as it is. The Spanish economy has become the main engine of the euro zone in recent years. GDP could grow by 3% this year, while that of the euro zone would stagnate at a forced pace, particularly given the deterioration of the economies of Germany and France. In its October observatory, the International Monetary Fund (IMF) raised its growth forecast for Spain from 2.4% to 2.9% in 2024.
Furthermore, in the case of SpainIt is estimated that the composition of growth depends above all on the national demandwhich further opens the door to the risk of overheating or generating imbalances in certain markets. “The new scenario for the Spanish economy reflects a gradual change in the growth model. External demand will give way to domestic demand,” argue Oriol Carreras Baquer and Javier García Arenas, economists at CaixaBank Research, in a recent service note. search for. the Catalan bank.
According to Funcas calculations, national demand will contribute 2.4 points and that of the foreign sector, six tenths. In particular, public consumption and exports of goods and services will remain the main drivers of growth, with increases in both cases above 3%. Private consumption is estimated to grow by 2.7%, two points less than the expected growth in household disposable income in real terms.
Gross fixed capital formation, however, remains on a relatively weak trajectory. That is, high consumption supported by previous savings or debt (consumption increases more than income) and productive investment that does not fully recover. Even if this melody is still far from that of the 1999-2007 cycle, the chorus seems almost the same… and what’s more, the ECB is called upon to lead rate cuts in the developed world.
Pressure from Germany and France
On the opposite side, the fire of weakness continues to spread and puts pressure on the ECB to continue lowering rates and put it out. It’s not just Germany. “France is another problematic point,” emphasizes Savary. “French 10-year bond spreads remain stubbornly high, around 74 basis points. The political paralysis in Paris suggests that the France’s terrible budgetary situation This will not improve in the short term. Even more worrying, France is approaching the point where the debt arithmetic is becoming increasingly difficult to manage. Specifically, annualized nominal GDP growth in the second quarter was 1.6%, compared to bond yields that currently stand at 2.9%. If the Paris Olympics saved growth in the third quarter, this will not be the case in the fourth quarter. The instability of French debt, especially as the country has a current account deficit of 0.5% of GDP, means that the ECB will have to ease its policy to prevent financial instability from spreading from France to the rest of Europe. “, adds the expert.
Incoming data continues to fuel these flames. “Germany and France remain the weak links in the eurozone” said Paolo Grignani, an analyst at Oxford Economics, last week after seeing preliminary indicators of private activity in the euro zone. Although German PMIs were slightly surprising on the upside, the general diagnosis continued to be, at best, anemia.
Frederik Ducrozet, economist at Pictet, looked at the German data: “The nail in the coffin? In Germany, job losses are increasing and price-setting power is weakening.” At the same time, in France, the manufacturing and service sectors both reported a deterioration in employment conditions, something that had not happened in four years. The political and historical weight of the two powers places a Eurobank in an important situation which cannot turn its back on them. “The ECB will come under increasing pressure go below its neutral rate, and quickly,” added Ducrozet after this new pressing data.
Something that was already in advance elEconomista.es Savary himself from BCA Research slid the ECB’s terminal rate a few weeks ago between 1% and 1.5% by the end of 2025, notably below the nominal rate of 2% (0% real) at which the ECB sets its neutral rate – the rate that would allow the economy to operate at full employment and with price stability, explains CaixaBank Research. Information from Reuters last week already revealed that there was a debate within the ECB to lower this neutral rate. Too much fuel for the already fast Spanish car?
