Debt & Deficit Outlooks for France, Italy, Spain, & Portugal

Is ‘ugly’ the right word? After dragging Greece kicking and screaming through a never-ending vicious cycle of fiscal adjustment and output decline, the European Commission seems to be softening in its attitude towards other struggling Eurozone economies.
France, Italy, Portugal and Spain, among others, have all repeatedly been given extensions to reduce their debt and deficit levels after recurrent breaches of EU targets have gone unpunished, and the trend looks set to continue as our forecasts show that those economies will underperform again this year and next.
Does this mark a shift in mindset within the Commission as to whether the Growth and Stability Pact is fit for purpose? Or rather just tactical maneuvering – or indeed resigned acceptance – in tough political times, as the EU faces unprecedented challenges to its legitimacy and survival?
Under the EU’s Growth and Stability Pact, all Eurozone countries are required to bring their deficits below 3% of GDP and to work towards reducing debt down to 60% of GDP, and any country failing to do so is subject to strict deficit reduction targets under the corrective arm of the Excessive Deficit Procedure. Certainly, widespread acknowledgement of the self-defeating Catch-22 whereby austerity lowers growth and thereby weighs further on public finances has encouraged the EU authorities to allow leniency in a number of instances, but this is only part of the explanation.

This post was published at Wolf Street on November 30, 2016.