ECB’s Villeroy
It’s wild that in 2027 — seven years after the pandemic emergency — governments will still be breaking eurozone deficit rules. This obviously doesn’t end well.
In the long analysis, I think it will show that the optimum path for politicians trying to win the next election is to spend more, in part because the stability of the euro delays the consequences. But at some point this becomes a collective action problem as no one wants to enforce the 3% deficit rule.
Moreover, it all falls apart when the eurozone ‘consensus’ in the Merkel/Sarkozy mould is challenged by a populist wave. They see this as existential and allow the standards on deficits to slip even further in order to protect the status quo.
Eventually, the market does what it always does to European countries that spend too much and the currency is wrecked.
Anyway, more from Villeroy:
- Most of the effort on deficits should come from spending reductions but targeted tax hikes needed too
- It would be better to take 5 years to get to 3%, which would remain in line with EU rules
- Sees 2025 GDP growth of 1.2%, unchanged from prior
- Sees 2026 GDP growth of 1.5% vs 1.6% prior
- Still sees 2024 HICP inflation at 2.5%
- Sees 2025 HICP inflation at 1.5% vs 1.7%
That last number is a real kicker and it puzzles me why the ECB isn’t signalling quicker rate cuts.
