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- The Global Economy - January 31, 2012
The Global Economy - January 31, 2012
31-01-2012 14:19
The fiscal pact is one step forward – strengthening growth and support mechanisms will be harder
- The EU has agreed on a fiscal pact with binding balanced budget rules for the euro countries (structural deficits may not exceed 0.5% of GDP). The pact is necessary and improves budget discipline in the euro zone, but could be difficult to assess. For example, it could be hard to sanction countries that breach the limits.
- The impact on demand in the euro zone of austerity could be quite negative. Now that the pact has been agreed upon, it is important that attention turns to growth and competitiveness – and that extensive structural reforms are implemented.
- The agreement bolsters the ECB’s confidence in the political commitment, paving the way for more liquidity support for banks. This will improve stability in the financial markets by providing indirect fiscal support for crisis countries. The ECB is also using “unconventional monetary policy” to buy time for politicians. Now the European Stability Mechanism (ESM), which will take effect earlier than planned, will need more resources to improve its short-term crisis management capabilities.
- The global economic picture varies, with slightly stronger development in the US, a slowdown in emerging countries and considerable sluggishness in Europe. We expect politicians to follow the lead of the central banks and introduce “unconventional fiscal policy” in an attempt to strengthen demand, despite a lack of true fiscal muscle.
