Long-term risks from fiscal relaxation

Long-term risks from fiscal relaxation

The suspension of fiscal rules for another year, up to 2023, creates opportunities as well as risks for European Union countries. Analysts tell Kathimerini that while this extension is necessary, some states run the risk of suffering long-term problems, even when the economy reverts to reality.

S&P Director of Sovereigns Marko Mrsnik says that “while in the near term, the ECB is containing large deficits via rapid and substantial policy actions, risks to the medium-to-long-term sustainability of highly indebted sovereigns’ public finances could rise in the absence of dynamic economic growth or a gradual budgetary consolidation. The key focus in the near term will be in supporting the economic recovery without introducing measures on revenue and spending side that would in net terms negatively impact the underlying structural budgetary position, which in the case of Greece became one of its strengths in the context of our rating assessment.”

He goes on to warn that “deterioration in structural budget balance could make the budgetary consolidation and by extension reduction in government debt-to-GDP in the coming years more difficult.”

HSBC senior European economist Fabio Balboni points out that the best chance to ensure full recovery is “to keep the parts of the economy still affected by the restrictions ‘frozen,’ preventing major bankruptcies so that when restrictions are finally lifted those sectors can recovery quick. This is important also for the ‘fiscal scarring’ left by the crisis – if there is full recovery then the underlying fiscal position should also recover to the prevailing one before the crisis, or close by. Imposing fiscal consolidation measures too early would hurt the ability of economies to bounce back fast, and perversely could even increase the degree of fiscal scarring left by the crisis.”

Spyridoula Tzima, assistant vice president of global sovereign ratings at DBRS Morningstar, expects that in Greece, as seen in other eurozone countries, “the fiscal measures to support economic activity will be phased gradually to avoid any cliff edge effects. As households and businesses adapt to the pandemic environment and the vaccination rollout gathers pace, the budgetary measures need to be more targeted towards sector that are expected to recover more gradually. Therefore the risks lie with ongoing measures not being specific enough.”

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