Eurozone: Fiscal consolidation challenges for governments | Oxford Economics Skip to content
Research briefing | June 28, 2024
Broad fiscal consolidation will constrain euro area growth in the short term. However, as growth becomes more dependent on private demand, uncertainty about the size and duration of business cycles means that risks to growth are tilted to the downside.
What you will learn:
Fiscal consolidation in euro area countries will be more gradual and about half as strong as the crisis of the early 2010s. It would also better target cuts to extraordinary support from a range of recent crises, reducing the risk of undermining long-term growth that could undermine fiscal health. There is a downside risk if the suspension of support measures has a negative impact on consumption recovery. However, we believe that households are well placed to absorb cuts in government support. Steady wage growth and rising savings rates, supported by higher deposit rates, should provide a cushion to support a recovery in consumption. Solid global demand, competitive currencies and expected significant monetary easing will support private demand. The risk of private sector deleveraging is low because the balance sheet does not have the significant external imbalances of the late 2000s. But many euro zone countries will tighten spending amid weak demand, potentially undermining efforts to rein in budget deficits. Successful fiscal consolidation would help limit debt issuance and rollover risks when the European Central Bank exits the sovereign debt market. But improvements could be uneven if recovery plans in high-deficit countries come under political pressure. There is also a downside risk to fiscal consolidation if the reintroduction of EU fiscal rules prevents long-term government investment that undermines growth potential. Return to resource hub
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