European economic growth is facing multiple pressures, can stepping on the "deficit brake" be effective?

Recently, the European Commission released a report that lowered the economic growth expectations for the EU and Eurozone in 2024 from 1.4% and 1.3%, respectively, to 1.3% and 1.2%. This adjustment reflects the EU's cautious attitude towards the economic outlook for 2024. From the current development situation, the EU's downward adjustment of economic growth expectations is mainly based on factors such as high inflation, high interest rates, and weak external demand. These factors work together to put multiple pressures on European economic growth.

Results caused by multiple factors

First, in recent years, the European economy has been hit by the COVID-19 epidemic and the Ukrainian crisis. Despite a temporary rebound in the European economy in 2021, the soon to come energy crisis has led to enormous cost pressures on energy intensive industries, with many companies having to reduce production, suspend production, and even go bankrupt. To this day, the geopolitical situation is still unclear, and the risks of reduced energy supply and rising energy prices still exist. The downward pressure on the European economy has not diminished.

Secondly, the high interest rates caused by interest rate hikes have tightened loan conditions for European banks, leading to a decline in loan demand for businesses and consumers. The debt pressure and reduced investment brought about by high interest rates have increased the risk of a short-term hard landing for the European economy.

Thirdly, the global economic recovery is weak, external market demand is weak, and European exports are continuing to shrink. In the third quarter of 2023, the import and export trade volume of the European Union decreased by 4.6% and 1.2% month on month, respectively, and the total export volume of the European Union decreased for three consecutive quarters. In addition, the EU also faces many structural challenges, including slow productivity growth, urgent acceleration of green and digital transformation, and aging population. Only by effectively addressing these challenges can the EU better maintain sustainable competitiveness.

Manage "excess deficit"

"The EU's fiscal rules have ushered in a new starting point." The Financial Times recently published an article stating that the EU has reached a consensus on reforming its fiscal rules - the Stability and Growth Pact - before the arrival of the new year 2024. The new rules stipulate that if the fiscal deficit of EU member states exceeds 3% of their gross domestic product, they must reduce the fiscal deficit within a specified period of time.

According to Eurostat data, the average government deficit rate in the eurozone is currently 3.6%, while the average government deficit rate in the EU is 3.3%, exceeding the upper limit set by fiscal rules. According to economic data released by the European Commission, approximately 12 EU countries exceeded the required 3% deficit rate for the entire year of 2023. Among them, countries such as France, Belgium, and Spain have a deficit rate of over 4%, while Romania, Hungary, Poland, Slovakia, Italy, and Malta have a deficit rate of over 5%. The European Commission has issued a warning that due to high deficits, many countries need to adjust their fiscal budget plans. If the warning is ignored, the investigation procedure and corresponding penalty mechanism for "excess deficit" stipulated in the Stability and Growth Pact may be initiated.

According to information on the official website of the European Union, the Stability and Growth Pact was launched in 1997 with the aim of promoting greater coordination of fiscal and economic policies among EU member states. In late December 2023, the Economic and Finance Ministers of EU member states reached an agreement on reforming the Stability and Growth Pact. Reuters reported that the new rules after reform propose more gradual and targeted spending reduction requirements, focusing on supporting public investment while reducing deficits and debt. The new rules require member states to reduce their deficits and debts within 4 to 7 years from 2025. If investment is chosen in priority areas advocated by the European Union, the deadline for deficit reduction can be extended. Debt interest expenses will not be included in the fiscal deficit until 2027. The Financial Times reported that the new rules reflect stricter overall spending restrictions and will be officially established as EU law once approved by the European Parliament.

In addition to the EU's "unified action", many member states have also announced "deficit reduction" measures. According to the Political News Network of the United States, Germany recently introduced a budget draft for 2024, which adheres to a frugal stance and plans to reduce the budget and lower the deficit. Currently, Germany has a fiscal shortfall of approximately 17 billion euros in 2024. The German government plans to cancel diesel subsidies for the agricultural sector and impose taxes on aviation fuel for flights within Germany, as well as plastic packaging for manufacturers and retailers, to increase fiscal revenue. According to media reports such as Reuters and the French newspaper Tribune, the French government has set a target of reducing spending by 16 billion euros in the 2024 budget and is currently seeking to reduce spending by an additional 12 billion euros from the 2025 budget. To this end, France is re examining its current social policy and plans to reduce expenses through measures such as reducing administrative office space expenses and selling properties. The French minister in charge of public accounts, Kazenaf, stated that the French government hopes to reduce the fiscal deficit to 4.4% of GDP in 2024 and 3.7% by 2025.

Finding a balance between development and deficit reduction

In 2023, with the cancellation of pandemic and energy subsidies by the European Union and its member states, the fiscal deficit rates of the EU and the Eurozone have slightly declined. With the EU and its member states further enforcing fiscal discipline, it is expected that the fiscal situation will improve. Overall, unless major accidents occur, the fiscal deficit rates of the European Union and the Eurozone will be in a slow downward trend from 2024 to 2025. However, in the coming period, the EU will still face challenges in reducing deficits and maintaining appropriate fiscal spending intensity.

Currently, the economic recovery of the European Union is still slow, and expanding fiscal revenue is facing difficulties. The multiple fiscal expenditures for aid to Ukraine and energy are largely dependent on changes in the external situation, and Europe faces considerable uncertainty in reducing its deficit. In the future, the effectiveness of the EU's efforts to reduce deficits will mainly depend on whether the EU can find an appropriate balance between gradually reducing government spending and maintaining economic growth. In addition, changes in the geopolitical landscape and international energy prices are also important influencing factors for the effectiveness of the EU's deficit reduction, and need to be tracked and observed.