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Clarity on EU Deficits Sought by Bond Markets, Says ESM Economist

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European Union Must Resolve Divisions over Deficit and Debt Rules, Says ESM Economist

European Stability Mechanism (ESM) Chief Economist Rolf Strauch has called on European Union (EU) governments to address their differences regarding new deficit and debt rules. This resolution is crucial to provide clarity to bond markets on how EU member states will repair public finances in the aftermath of the Covid pandemic and energy crisis. The limits on borrowing were temporarily suspended since 2020 to support households and businesses. However, with the old pact set to be reinstated on January 1, EU capitals are still struggling to reach a consensus on a revamped agreement.

Importance of Clarity for Bond Markets

Strauch emphasized the need for a clear picture of fiscal policies to satisfy investor demands and provide forward guidance. The ESM, established in 2012, acts as a lender of last resort to prevent a repeat of the euro-zone crisis. Strauch's comments come amid concerns about sustained high interest rates, which have triggered a global sell-off in government bonds, leading to the highest borrowing costs in over a decade.

Challenges with the Existing Fiscal Rules

Strauch acknowledged that the current Stability and Growth Pact has been problematic, with implementation and transparency issues. While EU governments do not face a vacuum without a new deal, Strauch believes improvements are necessary. With interest rates expected to remain high as the European Central Bank maintains tight monetary policy, governments must adhere to commitments for a more restrictive fiscal stance.
Lessons Learned and Mitigating Risks
Strauch cautioned against relying on a favorable relationship between growth and interest rates to justify high debt levels. He stressed the importance of governments acknowledging that interest rates will surpass growth. However, he also noted that extensive public spending in recent years has created cushions for households and companies, mitigating risks as interest rate hikes impact the economy. Strauch expressed confidence in the resilience of the financial system, with manageable corporate debt burdens and stress tests indicating banks can withstand severe downturns. In conclusion, the resolution of divisions over deficit and debt rules within the EU is crucial for providing clarity to bond markets and ensuring the repair of public finances. It is essential for EU governments to address these issues and commit to a more restrictive fiscal stance to navigate the challenges posed by high interest rates and economic recovery post-pandemic.

Implications for New Businesses Amid EU's Fiscal Uncertainties

The call by European Stability Mechanism (ESM) Chief Economist Rolf Strauch for EU governments to resolve their differences over new deficit and debt rules could have significant implications for new businesses. The uncertainty surrounding these rules could impact the fiscal stability of EU member states, potentially affecting the business environment.

Understanding the Bond Market Dynamics

New businesses, especially those reliant on bond markets for financing, need to understand the dynamics at play. Strauch's emphasis on the importance of clarity for bond markets underscores the need for businesses to stay informed about fiscal policies. The potential for high interest rates and a global sell-off in government bonds could create a challenging environment for businesses seeking to raise capital or manage debt.
Navigating High Interest Rates and Economic Recovery
Strauch's caution against relying on a favorable relationship between growth and interest rates to justify high debt levels is a critical lesson for new businesses. As the European Central Bank maintains tight monetary policy, businesses must be prepared for high interest rates. They need to factor this into their financial planning and risk management strategies. In conclusion, the ongoing discussions around deficit and debt rules within the EU could impact new businesses in various ways. It is crucial for these businesses to stay informed and adapt their strategies to navigate the potential challenges and uncertainties in the fiscal landscape.
Story First Published at: https://financialpost.com/pmn/business-pmn/bond-markets-want-clarity-on-eu-deficits-esm-economist-says
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