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Economy

Economy

Eurozone 2024 fiscal tightening is seen as limited by the slowing economy

European Commission President Ursula von der Leyen and European Central Bank (ECB) President Christi... European Commission President Ursula von der Leyen and European Central Bank (ECB) President Christine Lagarde attend a European Union leaders' summit in Brussels, Belgium March 24, 2023. REUTERS/Johanna Geron/File Photo
European Commission President Ursula von der Leyen and European Central Bank (ECB) President Christi... European Commission President Ursula von der Leyen and European Central Bank (ECB) President Christine Lagarde attend a European Union leaders' summit in Brussels, Belgium March 24, 2023. REUTERS/Johanna Geron/File Photo

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Eurozone 2024 fiscal tightening is seen as limited by the slowing economy. The eurozone governments will try to strengthen their public finances by eliminating costly energy price subsidies next year. Still, authorities predict that slower economic growth and a desire to avoid upsetting the electorate would restrain the amount of fiscal tightening.

The European Central Bank has urged nations to revoke the subsidies they had put in place to help consumers deal with the surge in energy costs that followed the outbreak of the Ukraine War, arguing that doing so would help it stabilize inflation over time.

However, removing them is politically controversial since it would temporarily raise rates for customers struggling to pay for necessities.

The 20 nations that use the euro must submit their draft budgets for 2024 by October 15 for review by the European Union. According to EU rules, if the budget deficit exceeds 3.0% of GDP, it must decrease by 0.5% annually until it falls within the allowed range.

The European Commission has also committed to begin disciplinary actions against countries with budget shortfalls greater than 3.0% in 2019. These actions might theoretically result in fines.

While the breadth of fiscal tightening will align with the minimal need, it is already evident that certain nations, like France or Italy, will continue to have growth rates far over the 3% cap in 2019.

France anticipates a budget deficit of 4.9% of GDP this year, 4.4% in 2024, and 2.7% in 2027, all gradually declining. To help people combat inflation, which is still far higher than the ECB’s 2% objective, Paris will increase welfare and pension payments in 2019.

According to the French fiscal watchdog, these proposals are unambitious and based on too optimistic assumptions.

Italy is to increase its 2024 budget deficit aim from the 3.7% objective stated in April to between 4.1% and 4.3% of GDP and increase its deficit this year from 4.5% to 5.5%, sources told Reuters on Monday.

The prime minister, Giorgia Meloni, wants to continue tax cuts that have helped middle-class and low-income employees deal with rising consumer prices this year through 2024, even though eurozone ministers decided to halt them in July. Market retaliation has already increased Italy’s risk premium.

Germany is still deciding how long to preserve industry energy subsidies and whether a new program is necessary, even though it plans to reduce the deficit from 2.5% to 2.0% next year.

Aside from EU regulations, the ECB has to tighten fiscal policy in 2024 because it may have reached its ceiling in raising interest rates without endangering the economy. This is because the ECB has been raising rates steadily since mid-2022.

The euro zone’s central bank has urged governments to assist in curbing the still-higher-than-5% rate of price increase. Although they concur, the ECB’s inflation issues are not necessarily their primary concern, according to eurozone finance ministers.

No one, according to a senior euro zone official, “has the ECB in mind when they decide on their budgets.” “Some are voting, others are experiencing a recession; preliminary data indicates that the situation is worse than initially believed.”

All these countries’ administrations are apprehensive about cutting spending since elections are coming up in Belgium, Austria, Lithuania, and Croatia.

By the end of the year, Spain, whose parties are still attempting to form a government following unsatisfactory July elections, may have extended some of the existing regulations or put additional ones in place.

Slower economic development is ineffective. The Commission revised its estimates for the euro zone’s growth downward, from 1.1% in 2023 to 0.8% and from 1.6% in 2024 to 1.3%. With GDP estimates of 0.7% for 2023 and 1.0% for 2024, the ECB is even more gloomy.

The weaker economic picture “may change fiscal planning somewhat,” a second senior euro zone official warned.

According to the ECB, most nations are abiding by the July agreement to terminate subsidies. The ECB monitors more than 500 temporary fiscal measures implemented by eurozone governments to lower household energy bills.

“We advise member nations to scale back any programs, subsidies, shields, or grants they may have implemented. The majority of member states are doing so, according to ECB President Christine Lagarde, who spoke to the European Parliament on Monday.

Contrarily, the elimination of the subsidies will raise consumer prices in 2024, keeping inflation at 3.2%, as reported by the ECB, as opposed to 2.9%, as predicted by the Commission. However, over time, the ECB claims that this will stabilize prices.


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