The cut in public spending will lead to recession in Europe, according to the Financial Times
According to economists reported by the Financial Times, the reduction in public spending is set to dampen economic growth in the eurozone next year, when the bloc enters an era of budget restrictions, putting pressure on those responsible for setting rates to loosen monetary policy. The new budget rules approved last week will certainly not make things easier, on the contrary they will further ballast the economy.
EU finance ministers this week agreed new fiscal rules that replace tough but difficult-to-enforce budget constraints that have been suspended since the pandemic hit in 2020.
The measures will gradually introduce stricter spending limits, forcing high-debt countries to present debt and deficit reduction plans and set an annual spending ceiling, as agreed with Brussels.
The new rules “will still be restrictive and for high-debt countries like Italy this is bad news,” said Lucrezia Reichlin, a professor at the London Business School and former director general of research at the European Central Bank.
Meanwhile, the German government approved a budget for next year only by cutting spending, eliminating some tax breaks and selling assets after the country's constitutional court left a 60 billion euro hole in its spending plans.
Economists expect an abrupt end to nearly three years of supportive fiscal policy in the bloc, as a return to more limited government spending further squeezes demand and activity. The eurozone economy contracted 0.1% in the third quarter, after stagnating for most of the year . The situation risks being much worse in the fourth quarter and in 2024.
Jack Allen-Reynolds, an economist at consultancy Capital Economics, said the new EU rules will be "tougher" as they will require high-debt countries, such as Italy, to cut their budget deficits more quickly, but also “more lenient” as they will allow countries to reduce debt levels more slowly. In the meantime, however, public spending will have to be cut and this will severely limit growth. It is not clear whether those who signed the agreement were clear on what this means in this political moment.
Some fear that this change could mark a return to the pre-pandemic situation, in which the ECB had to shoulder most of the burden of economic stimulus, forcing it to resort to negative interest rates and massive bond purchases to ward off deflation. This could certainly serve to relaunch some speculative bubbles, but without the fiscal lever alongside the monetary one we will go from one series of bubbles to another, but we will not have serious economic growth or serious industrial growth.
It seems astonishing that a newspaper that was born as the official voice of the Western world and capitalism understands what 27 European countries have not understood: that austerity imposed by dint of directives and beatings destroys growth, and, an implicit message, causes the decline of the European Union in the global context, because it progressively reduces its economy and industry compared to the rest of the world. Yet this simple concept seems impervious to Brussels and Berlin. After all, the exercise of power occurs through the arbitrary exercise of violence, and imposing senseless rules is also a form of violence. Power, not wealth, is all that matters to Brussels and Berlin.
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The article Cutting public spending will lead to recession in Europe, word from Financial Times comes from Economic Scenarios .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/il-taglio-della-spesa-pubblica-portera-alla-recessione-in-europa-parola-di-financial-times/ on Sat, 23 Dec 2023 07:00:29 +0000.