Investment Institute
Macroeconomics

Fiscal Woes


  • We review the recent batch of stability programmes in light of the recent EC proposals for new fiscal surveillance rules in Europe. A simultaneous fiscal adjustment is looming for 2024.
  • As we are still waiting for a resolution of the US debt ceiling drama, we explore some of the ramifications of a failure to agree.

The political debate is far from over on the European Commission’s proposals for a reformed fiscal surveillance framework, but as they stand, they would incorporate “minimum adjustment” values for most Euro area countries, i.e., reducing the structural deficit by at least 0.5% of GDP and bringing back the debt ratio below its starting value. We test the new batch of the stability programmes submitted by all national governments earlier this month against these potential rules. 7 of the 8 member states we study (the larger ones by GDP weight) would pass. Yet, in several cases, the room for manoeuvre in case of accident would be limited, and we note that these plans assume a “benign landing” of the European economy, with inflation normalizing without much of an adverse effect of the ongoing monetary tightening on GDP growth. Moreover, since most of the member states are planning a front-loaded fiscal adjustment with a significant effort in 2024, the “feedback” effect of such a simultaneous austerity turn may be understated, especially since – according to the ECB research itself – the impact of its monetary tightening on growth is likely to still be significant next year.

But none of this is for immediate consumption: the market is understandably focused on the US debt ceiling drama. While we wait for a possible resolution, we explore the ramifications of a “no deal” configuration. We believe the Fed would be forced into massive intervention to salvage the Treasury from the risk of losing market access. It is however doubtful the Fed could do much to deal directly with the adverse macro consequences of the deferment of non-interest spending. Looking ahead, even if a short-term fix is found, we are concerned that fiscal issues have become so ideologically charged in the US – in contrast with what prevailed until the beginning of this century. As both parties bicker over the debt ceiling, they are losing sight of the fact that significant action will be needed within the next few years to put US public debt on a sounder footing. This would call for a large measure of bipartisanship which looks unattainable in the present configuration.

Related Articles

Macroeconomics

Electrify Europe

Macroeconomics

October Op-ed - Meeting in the middle

Macroeconomics

October Monthly Investment Strategy - A far-reaching US election

    Disclaimer

    This website is published by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W) for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation or particular needs of any particular person and may be subject to change without notice. Please consult your financial or other professional advisers before making any investment decision.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future performance.

    Some of the Services and/or products may not be available for offer to retail investors.

    This publication has not been reviewed by the Monetary Authority of Singapore.