2024 may prove crunch time for euro area public finances. EU member states have agreed to reform fiscal rules, but the jury is still out on whether the changes could lead to more draconian or lenient fiscal policies over time. In any case, the old rules apply again this year – although not completely. More importantly, with more moderate nominal GDP growth and higher debt service, governments will face greater pressures to reduce their deficits. However, the political background in Europe is challenging to say the least. While Germany is about to embark on a new consolidation path, neither France, Italy nor Spain appear to be on the same track. Italy is considering a gradual transition to a flat tax; France faces ever-increasing demand for public goods despite already having one of the (if not the) highest public spending ratios in the EU, while Spain has rolled back some of the reforms that made its post-financial crisis glory. Finally, with the ECB announcing a faster reduction in its balance sheet7, member states will have to rely even less on it to finance their public deficits. Thus, in 2024 there may be renewed pressures on spreads, with high vulnerability to external shocks and/or political crisis.
5 European Central Bank, 6 Bloomberg, 7 European Central Bank