War on the doorstep, right-wing extremists in power, dispute over debt rules and the ECB under inflationary pressure: 2022 could anything but go smoothly for the euro zone.
Prices are already rising and lockdowns have spread across the continent. But even if the virus is finally defeated, there is a hodgepodge of new potential threats that, if caught, are likely to fuel another tumultuous year for the bloc’s economy. Markets have a lot to navigate.
In Brussels, tensions will arise between policymakers over post-Covid spending, Emmanuel Macron faces voters in France, political unrest threatens to return to Rome and Vladimir Putin could use Europe’s gas supply as a weapon if Russian troops gather at the Ukrainian border.
The next year should be marked by recovery, but it could be a rocky 12 months for Europe.
Fight over debt rules
Grueling talks about how Europe’s debt rules can be reshaped for a post-pandemic world will have a lasting impact on the region’s economy. Tensions between North and South over new spending restrictions will explode.
The EU’s Stability and Growth Pact (SGP) requires countries to limit their mountain of debt to 60 percent of GDP and their deficit to 3 percent, rules that have been suspended until 2023 due to the pandemic.
However, the southern countries of the bloc consider a return to the old regulations unimaginable in a post-pandemic Europe. Debt is over 150 percent of GDP in Italy and over 110 percent in Spain and France.
Mountains of national debt are making it impossible to meet current targets and the South would like more flexibility in spending in order to stimulate growth through investment. But they will face fierce resistance from the north.
In view of the enormous differences between Germany and Italy, EU economic commissioner Paolo Gentiloni has called for debt limits to be set from country to country.
The former Italian Prime Minister has warned that the EU rules “cannot lump all countries into one pot” because the “differences in debt ratios are too great for that”.
However, extremely prudent northern nations are opposed to a radical change in the rules that would allow indebted countries to borrow more. The anti-credit “Frugal Four” from Austria, the Netherlands, Denmark and Sweden have already warned in new rules that “reducing excessive debt ratios must remain a common goal”.