Eurozone governments must further strengthen fiscal containment measures this year and next year to definitively curb inflation, even in a context of recession (which is already happening at the level of the Eurozone and of some countries in the currency region, such as Germany, with tends to get worse), is due today (Thursday 13 July) to defend the Eurogroup (the informal European Council of finance ministers of the euro) at its last meeting before the summer break.
After the European Central Bank (ECB) sent very stern warnings to businesses and workers asking them to do their part to combat the inflationary pressures that had begun to make high inflation “persistent”, it asked businesses to more restraint on profit margins and workers more moderation in wage demands going forward — now is the time for governments to take action.
According to Brussels and the Council of Euro Ministers, the way forward should be one of more “caution” in budgetary choices, namely on the expenditure side, avoiding, for example, “permanent” increases in spending.
Today’s Eurogroup will again debate the need for “a swift agreement on the reform of the economic governance framework” and, to act continuously, and more importantly, to ensure that euro countries respect the rules of the Stability Pact, that will come into full effect next year.
More recession on the horizon
In March, the Eurogroup statement on budgetary guidance for 2024 was published, even before the technical recession of the eurozone as a whole and in countries such as Germany, Ireland, Lithuania(all with declines in GDP – gross domestic product in two consecutive quarters, in the fourth of 2022 and the first of 2023), already said that “during 2023-2024, prudent fiscal policies should be aimed at ensuring the sustainability of debt “.
And “increasing potential growth in a sustainable way, in the ecological and digital transitions, and with investments and reforms”.
Euro finance ministers, including Fernando Medina, then agreed that fiscal policy should help “ensure the stability of the eurozone economy and facilitate the effective transmission of monetary policy in a context of high inflation “.
Thus, the Eurogroup continues, “taking into account the economic outlook and a context of high inflation and more restrictive financing conditions, we ministers reiterate that a general fiscal stimulus to aggregate demand is not justified”.
“We will closely monitor the impact on aggregate demand and on the budgetary orientation of additional energy support measures or the extension of existing measures, also taking into account the uncertainty of the evolution of energy prices”, but “we must avoid permanent measures that shortage”.
The updated statement due to be adopted next Thursday will be close to the pledge made on the eve of spring, even as inflation shows signs of setback and euro economies falter
Portugal appears in a study by the European Commission (EC), which will be discussed at the table of the Eurogroup this summer, as one of the euro countries where the budgetary situation for 2023 is one of “contraction” and “consolidation” of government accounts , with the forecast for 2024 it is expanding, but very weak.
Yesterday (Wednesday, 12) Fernando Medina, who repeatedly congratulates himself on what he says are the Portuguese “correct accounts”, moderated his enthusiasm in an interview with Bloomberg.
He acknowledged the growing “risks” of a deepening recession in the Eurozone and greater problems in the economies as the ECB’s interest rate hikes are passed on to the economic fabric and weaken demand and activity.
In Germany, it is not just the technical recession that is a cause for concern. The unemployment rate is already clearly rising.
It is the largest economy in the eurozone and the European Union, which is why Germans and all other countries in the union are concerned. Germany is Portugal’s second largest economic partner after Spain in investment and international trade, including tourism.
As mentioned, in an interview with Bloomberg, Medina took on greater concerns. You will have reasons for this.
While it is true that the financial target for this year is to keep the government deficit at 0.4% of GDP and that in 2024, a year of increasingly negative risks for the economy, the idea is to reduce this balance to only 0.2% (says the Portuguese Stability Program), it is also clear that the latest signals from the real country are not the best.
Even with the measures taken by the government, the cost of living for the poorest Portuguese (the majority of the population) has deteriorated a lot.
For those who have debts and need to make bank payments (eg because they want to buy a house), the effect of the ECB’s policy is overwhelming. And it’s not over yet. “We still have a long way to go,” reiterated Christine Lagarde, the president of the euro’s highest authority, in Sintra at the end of June.
In the aforementioned interview, Medina argues that “the risks that new hikes could create a more difficult situation for European growth are now greater and need to be analyzed very carefully”.
The problem with Portugal’s government accounts is that, despite strong deficit compression and “certain accounts”, the weight of government debt remains one of the largest in Europe. And with it the interest burden, which ends up in the deficit and therefore may require additional consolidation measures. Because interest owed to creditors must always be paid, say good debtors.
With that in mind, debt is of course Medina’s priority. “Most likely we will end 2023 with a debt ratio lower than that of Spain, France and probably Belgium as well,” he said, quoted by Bloomberg. In other words, it implies that government debt could even fall below 107.5% of GDP (target of the Stability Programme).
In any case, this weight remains very high by the standards of more developed Europe and the Pact. It’s falling, but it’s not enough to free the country from the label of debt that the pact (the old and the new coming in 2024) says should still be and max out at 60% of GDP.
Luís Reis Ribeiro is a journalist for Dinheiro Vivo
Source: DN
