Lack Of Reform Means Bigger Role For ECB
BMI View: Growing opposition to austerity will undermine eurozone fiscal reform momentum over the coming years, particularly in peripheral economies with riskier debt loads. While an ECB pledge to 'do whatever it takes' to save the eurozone has lowered borrowing costs and improved debt sustainability, this same pledge is likely to undermine governments' appetite for reform. Sluggish progress tackling debt loads will make the eurozone increasingly reliant on ECB monetary expansion, which itself will be insufficient to prevent the region entering a 'Japan-style' period of low growth over the next decade.
The ECB's 2012 pledge to buy unlimited sovereign bonds through its Outright Monetary Transaction (OMT) facility has made investors too complacent about eurozone debt sustainability. Periphery yields are below pre-crisis levels, equity valuations have recovered, and markets are more stable. A commitment to buy an unknown quantity of bonds, and under an unknown set of criteria, has seemingly done enough to dispel fears of a eurozone breakup, supported by the latest round of ECB policy easing in June. Optimism has also been boosted by Ireland and Portugal (sovereign) and Spain (banking sector) exiting EU/IMF bailouts. Some progress trimming deficits implies the prospect of a eurozone economy defaulting looks remote at present.
However, austerity-weary governments are now facing growing domestic political challenges, and look to be losing the appetite for reform. Low borrowing costs have allowed governments to avoid implementing painful reforms, and governments are relying on improving GDP growth rates to eat away at public debt loads. Paradoxically for the ECB, improving short-term stability and lowering yields looks to have kicked the reform can down the road, committing the ECB to expanding its balance sheet to help secure debt sustainability over the long term.
|Most Bearish On Periphery Reform Momentum|
|2014-2016 Fiscal Deficit Forecast, % GDP (Average)|