Mihir Sharma
A spectre is haunting Europe: the threat of bond-market contagion. Franceโs fiscal failures are the source, and now even countries that were supposedly improving their finances are in danger.
Italy, for one, has managed to cut its fiscal deficit, but its macroeconomic recovery is very sensitive to rising yields on its sovereign debt โ and hence its borrowing costs. Years of fiscal mismanagement will cause its debt to hit 139 per cent of gross domestic product this year.
Trouble is brewing beyond the eurozone as well. Romania, going through another bout of political turmoil after failing to install a government on September 30, has yields of about 7.3 per cent.
Weโre still some distance from a repeat of the 2010-2012 eurozone crisis. But there is a reason the European Union has for a decade lurched from one emergency to another, and why every moment of stress โ the 2022 loss of Russian gas, the Iran war, Franceโs overspending โ threatens to push it over the brink. It has consistently failed in good times to prepare for the bad.
Look beyond France at some of the blocโs apparent successes. When you dig deeper, irresponsibility is rife.
Italy is actually running a budget surplus and Giorgia Meloniโs government has stayed in power for nearly four years, giving the notoriously unstable republic an unprecedented spell of stability. But her government is still demanding that EU rules are bent to let it spend more.
Countries that rack up half-decent numbers reckon that gives them licence to be irresponsible for the next few years, like dieters who think a 10-minute walk allows them to wolf down a bucket of fries.
Consider the Czech Republic. Its populist billionaire leader has announced a budget that would massively increase the deficit to 3.5 per cent of gross domestic product from 2.1 per cent in 2025. Naturally, its bond yields have reached levels not seen since 2022.
Spain is even more disheartening. Prime Minister Pedro Sรกnchez has called fresh elections, although heโs trailing badly in the polls.
He has run three successive minority governments now, and perhaps hopes he can pull off an unlikely fourth win. The country is blessed by culturally compatible Spanish-speaking migrants, a climate thatโs perfect for renewable energy and favourable growth numbers as a result. But thereโs been no real fiscal consolidation, even though the headline deficit has fallen.
The OECD points out that Spainโs structural deficit โ what the deficit would be if the country grew steadily at its highest sustainable rate โ isnโt declining. Thereโs nothing in the tank for when the engine begins to sputter.
Spain typifies Europeโs problem. In times of crisis, countries look to the rest of the EU for help. In happier times they bank nothing, for themselves or the bloc.
Instead of being a source of strength in a struggling continent, Spain has sought to leave to others the tough job of dealing with markets, suggesting a European-level borrowing facility that could raise money on its behalf.
Sรกnchezโs attempt to introduce rent controls โ which was defeated in parliament, precipitating his call for new elections โ is typical.
The housing shortage is a real problem, but his response was poorly thought through populism, including the automatic renewal of rental contracts. Whatโs needed is a genuine attempt to fix the problems that have turned Spain from a house building champion, adding 800,000 a year before the financial crisis, into a NIMBY paradise.
Financial markets look at Europe and dislike what they see: a continent that hasnโt come to terms with its ageing population and the straitened finances that inevitably follow. They see patches of growth โ Poland, Spain โ but no sign this is being matched by the fiscal reforms that will make this growth sustainable.
Politicians are unable to tell electorates the truth about the necessary sacrifices, and voters refuse to believe it even when theyโre told. Investors baulk at populistsโ insincere and undeliverable promises, and the instability they create.
Europe is an ageing continent that refuses to grow up.
Above all, they see a continent-wide unwillingness to embrace the welfare and immigration reforms that might prevent stagnation.
Many countries are refusing to build new homes, too, even though housing costs are crippling growth and alienating the young.
No wonder bond markets are pushing yields higher. Europe is an ageing continent that refuses to grow up. Itโs spending as if itโs in the first flush of youth, without the earning capacity to justify that.
This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mihir Sharma is a Bloomberg Opinion columnist. A senior fellow at the Observer Research Foundation in New Delhi, he is author of Restart: The Last Chance for the Indian Economy.
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