European countries have to shoulder the burden of the economic response to the war in Ukraine. That will add to the debt loads accumulated during the pandemic, at a time when the European Central Bank is pushing up borrowing costs. But governments can afford to be bold.
to a little under 100% of GDP, with Italy’s at 150%. And the ECB’s actions are pushing up funding costs, with Italy’s 10-year bond yield doubling to 2% since October. The looming budget hit has prompted calls for a common European Union fund, though that looks unlikely.
Luckily, interest rates are still lower than inflation: with Italian price rises seen by Bank of America at more than 6% this year, the country still funds itself at minus 4% in real terms. That reduces the impact of extra borrowing on debt ratios. Furthermore, the average maturity of euro zone public debt has lengthened in the last 15 years – from six to seven years in Italy, and from seven to over eight years in France.
And the ECB’s monetary policy remains relatively loose. Unlike the Federal Reserve, it is not about to shrink its balance sheet. Borrowing costs should remain moderate. Even in the scenario where it would have to borrow another 4% of GDP, Italy’s interest costs would only increase by a yearly 1.5 billion euros at current rates.
Europe suspended its debt and deficit rules to let governments spend during the pandemic. It has no reason to reinstate them any time soon.- Leaders of European Union member countries will this week consider new measures to cushion households and businesses against soaring energy prices, and consider measures to jointly purchase gas, liquefied natural gas and hydrogen, according to a draft summit communiqué seen by Reuters.
- At a summit meeting to be held on March 24 and 25, the EU heads of states or governments will also agree “to provide support to the Ukrainian Government for its immediate needs and, once the Russian onslaught has ceased, for the reconstruction of a democratic Ukraine,” according to the draft release.Editing by Neil Unmack and Oliver TaslicReuters Breakingviews is the world's leading source of agenda-setting financial insight.
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