With war on its doorstep, the far right in power, wrangling over debt rules and the ECB stuck in an inflation deadlock: 2022 could be anything but easy navigation for the eurozone.
Prices are already skyrocketing and lockdowns have spread across the continent. But even if the virus is ultimately defeated, there are an assortment of potential new threats ahead that are likely to fuel another tumultuous year for the bloc’s economy if it ignites. The markets have a lot to navigate.
Tensions between policymakers will emerge in Brussels over post-Covid spending, Emmanuel Macron faces voters in France, political unrest is likely to return to Rome and Vladimir Putin could arm Europe’s gas supply then that the Russian troops amass at the Ukrainian border.
The following year was supposed to be another marked by recovery, but for Europe it could be a difficult year.
Debt settles the battle
Exhausting discussions of how to reshape European debt rules for a post-pandemic world will leave a lasting mark on the region’s economy. Tensions between north and south over new spending restrictions are about to explode.
The EU’s Stability and Growth Pact (SGP) requires countries to limit their debt to 60% of GDP and the deficit to 3%, rules that have been suspended until 2023 due to the pandemic.
However, the countries in the south of the bloc believe that a return to the old regulation is unimaginable in a post-pandemic Europe. Debt amounts to over 150% of GDP in Italy and over 110% in Spain and France.
Mountains of public debt make it impossible to meet current targets, and the south wants more flexibility in spending to spur growth through investment. But they will face fierce resistance from the north.
Paolo Gentiloni, European Commissioner for the Economy, called for debt limits to be set country by country given the huge variation between Germany and Italy.
The former Italian prime minister warned that EU rules “cannot group all countries together” because the “differences in debt ratios are too high for that”.
Yet the ultra-cautious nations of the North are lining up against a radical change in the rules that would allow indebted countries to borrow more. The anti-borrowing “Frugal Four” of Austria, the Netherlands, Denmark and Sweden have already warned that “reducing excessive debt ratios must remain a common goal” in the new rules.