FX168 Financial News (North America) Goldman Sachs (Goldman Sachs) analysts have predicted economic recovery in the Eurozone post-pandemic era, stressing that they believe the European Central Bank (ECB) will boost its unprecedented stimulus measures and suggest that they may no longer rely on fiscal austerity policies.
European investors are concerned about what kind of stimulus measures the ECB will take, especially after the Federal Reserve raised its inflation expectations last week and expects another rate hike in 2023.
Goldman Sachs chief European economist Sven Jari Stehn (Sven Jari Stehn) said in an interview with the NBC Financial Channel (CNBC) “Street Signs Europe” program on Monday that the Federal Reserve's latest position “should give the (ECB) Management Committee more confidence that it can begin to reduce emergency anti-epidemic debt purchase plan (PEPP) purchases later this year.”
Since the outbreak of COVID-19, the ECB has launched a new bond purchase program called the “Emergency Anti-epidemic Debt Purchase Plan.” The current plan will continue until March 2022, totaling 1.85 trillion euros (2.2 trillion US dollars).
“We do think the ECB will withdraw from the emergency anti-epidemic debt purchase program at the September meeting entering the fourth quarter,” Stern said, but at the same time added that the ECB “is in no hurry to follow the Fed's accelerated withdrawal (monetary policy) schedule.”
Goldman Sachs estimated last week that, supported by progress in vaccination programs, the Eurozone's GDP growth this year would exceed consensus and reach 5.4%.
However, there are still fears that inflation will not rise to the level desired by the ECB, although different Eurozone economies are experiencing reopening. Therefore, this requires continued support from central banks whose main target is inflation.
Goldman Sachs expects the potential core inflation rate to “gradually rise” to 1.5% in the fourth quarter of this year. The ECB's mission is to ensure price stability and keep the inflation target “close to but below 2%.”
No more austerity policies?
During the COVID-19 pandemic, governments also increased fiscal support and relaxed budgets — in stark contrast to the austerity measures implemented by the Eurozone after the 2008 global financial crisis.
The reason this approach works is because all 19 Eurozone countries have decided to temporarily cancel the EU's budget regulations in order to have more room to spend and reduce the impact of the pandemic on the economy. However, 19 countries will discuss revising the EU's budget rules, which some believe are too strict and out of date.
Goldman Sachs (Goldman Sachs) analysts said in a report last week: “We do expect that a version of fiscal rules will be implemented from 2023... However, we have four reasons to believe that the restoration of fiscal consolidation will not be as sudden as after the global financial crisis and during the Eurozone COVID-19 crisis.”
According to Goldman Sachs, these factors include: the Green Party is expected to occupy an important position in the next German government and demand a more relaxed fiscal policy; the possibility that tax revenue will increase; more and more people in Europe are calling on governments to focus on growth caps rather than strict debt regulations, and the fact that upcoming EU funding will not be taken into account in Eurozone countries' deficits and debt targets.
However, as countries such as Austria, Ireland, and the Netherlands argue that once the impact of the COVID-19 pandemic is over, they should return to a conservative fiscal path, and the debate over future budget rules is expected to be intense.