Fra Fitch solutions:
Eurozone Reforms: Important Questions Remain Unanswered
Key View
• Eurozone finance ministers agreed a package of reforms on December 4, representing the largest set of reforms implemented since the 2010-15 debt crisis.
• We believe some progress has been made bolstering banking sector regulations and the bloc’s EUR500.0bn government bailout fund, the European Stability Mechanism (ESM).
• But on the whole, crucial decisions about creating a eurozone budget and a common scheme to guarantee bank deposits were not made.
• We at Fitch Solutions believe the reforms fall short of those needed to fundamentally remedy the eurozone’s structural weaknesses, which in our view will become painfully exposed if there is another global downturn.
A package of reforms agreed by eurozone finance ministers will ultimately fall short of providing the bloc with the tools needed to successfully mitigate the impact of any future economic downturns. The reforms were agreed, after 18-months of negotiations, on
December 4. Ministers were under pressure to agree on a reform package before an EU summit on December 13.
Mario Centeno, president of the eurogroup, hailed the outcome as a ‘breakthrough on some key issues’. We at Fitch Solutions believe this is an optimistic view. The euro remained unmoved on the back of the developments, implying that investors potentially feel the same way.
The reform package comes at a crucial time for the bloc. Economic sentiment, coincident and GDP indicators have slowed markedly in recent months , and point to a growth slowdown in 2019. From 2.4% growth in 2017, we forecast GDP growth of 2.0% in 2018 and 1.7% in 2019.
Further below, we outline the reforms in more detail. But the key takeaway is that the reform package agreed to does not go far enough. Investor concerns about elevated government debt levels are likely to remain an issue for the foreseeable future, even with eurogroup attempts to increase bondholder risk sharing in any future government bailout scenario. We still believe that the region would enter a future downturn in a worse position than in 2008
The lack of progress on creating a eurozone budget will contribute to a continued north/south eurozone development disparity. A shared budget would partially compensate for the lack of surplus recycling mechanism since the euro’s inception, which would in theory help.
