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HSBC: The risk of a… cliff in the Eurozone after 2026

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HSBC: Ο κiνδυνος ε&nu σ…γκεστηωζνητ&omicron ; 2026

The return of the fiscal rules and the prospects

The latest forecasts of the European Commission for the course of the individual economies of the Eurozone are commented by HSBC in today's analysis, which leave a note of optimism for the growth, but at the same time give the impression of a “gloomy fiscal picture”.

As the British bank points out, the return of EU fiscal rules means that some countries – France and Italy in particular – could face difficult consolidation challenges from next year.

Gloomy fiscal picture
While the growth forecast was little changed, the Commission now expects a higher deficit for the eurozone as a whole, and particularly in some countries, including big ones like France and Italy.

The EU-US gap is widening

In the first case, this is due to the big miss on last year's deficit target and the government's decision not to pass a supplementary budget this year.

For the second, it is due to the cost of housing tax credit and the government delaying any decisions on austerity measures for 2025 until the autumn. Coupled with rising borrowing costs, this means debt-to-GDP ratios are also likely to continue rising in these countries – and for the eurozone.

HSBC: Ο κiνδυνος ενoς… γκ&rho ;εοστοεωνημεοτο /p> </p>
<p> </p>
<p><strong>EU rules are back</strong></p>
<p>After being suspended by the pandemic, the EU's fiscal rules are back, with some changes. But 3% of GDP remains the deficit threshold, so at least nine countries are set to enter EDP this summer. At a minimum, under the new rules, the fiscal adjustment required under the EDP (at least 0.5% of GDP per year) could be lower than that required for highly indebted non-EDP countries, which must reduce their debt ratio by 1% per year on average.</p>
<p>Analyzing the countries' outlook, it is striking to note that by 2023, despite the fact that all countries have surpassed the pre-pandemic level of GDP, only three (Portugal, Cyprus and Ireland) managed to shrink their deficits below 2019 levels, while all others still ran higher (and in some cases significant) deficits.</p>
<p>< strong>Challenges</strong></p>
<p>However, even a 0.5% adjustment (in the primary balance) could be challenging for some countries. This reflects a difficult political context, as structurally higher spending compared to 2019 (mainly on health, social services and support measures for households and businesses) and inflation-related tax revenue growth is in largely past.</p>
<p>So the 2025 budget negotiations starting in the autumn may prove difficult. More spending under the Recovery Fund (NGEU) will help on the growth front, but also increase the risk of a post-2026 “cliff” unless countries make room for more investment spending at home.</p>
<p >The ECB will also be watching closely as it becomes increasingly wary of the inflationary effects of expansionary fiscal policy and calls on fiscal authorities to help bring inflation back to 2%.</p>
<p><strong>The NGEU for … rescue?</strong></p>
<p>There is still much to be spent under the NGEU. So far, the Commission has disbursed €148 billion in grants and €84 billion in loans from the Recovery and Resilience Facility (RRF) under the Next Generation EU (NGEU) funds – so €232 billion in total. This means that almost two-thirds of the €650 billion allocated to member states has not yet been disbursed.</p>
<p>Expenditure is likely to have been even lower. For example, by the end of last year, official figures show that Italy – the largest recipient of NGEU funds – had spent only €43 billion, while receiving €102 billion from the EU. Even so, the Commission estimates that GDP was 0.4% higher in 2022 than it would otherwise have been without the RRF, with the unemployment rate at 0.2 p.m. lower.</p>
<p><p><img decoding=Source: 24h.com.cy

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