Villeroy from the European Central Bank
It is strange that governments are still violating eurozone deficit rules in 2027 – seven years into the pandemic emergency – and it is clear that this will not end well.
In the long run, I think this would suggest that the optimal course for politicians trying to win the next election is to increase spending, partly because the stability of the euro delays the consequences. But at some point this becomes a collective action problem, as no one wants to impose the 3% deficit rule.
Moreover, all this collapses when the Merkel/Sarkozy eurozone “consensus” is challenged by a populist wave. They see this as an existential matter and allow deficit norms to slide even lower in order to protect the status quo.
Ultimately, the market does what it always does with European countries that spend too much, and the currency collapses.
Anyway, more from Villeroy:
- Most of the effort to address the deficit should come from spending cuts, but targeted tax increases are also needed.
- It would be better if it took 5 years to reach 3%, which would still be in line with EU rules.
- GDP in 2025 is expected to grow by 1.2%, unchanged from the previous year.
- GDP is expected to grow by 1.5% in 2026, compared to 1.6% previously.
- The CPI inflation rate for 2024 is still expected to be 2.5%.
- The CPI inflation rate for 2025 is expected to be 1.5% compared to 1.7%.
The last number is a really amazing number and it amazes me why the ECB is not signaling a faster rate cut.
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