Goldman Sachs makes two predictions about economic recovery in Europe – .

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Goldman Sachs makes two predictions about economic recovery in Europe – .


The headquarters of the European Central Bank (ECB) at sunset in Frankfurt, Germany on Tuesday, April 20, 2021.
Bloomberg | Bloomberg | Getty Images
LONDON – Experts at Goldman Sachs have laid out their forecasts for an expected recovery in the eurozone, pointing out when they think the European Central Bank will lift its unprecedented stimulus measures and also suggesting that austerity measures can no longer be relied on .
European investors are obsessed with what the European Central Bank will do in terms of stimulus, especially after the US Federal Reserve raised inflation expectations last week and predicted further rate hikes for 2023.

Speaking to CNBC’s “Street Signs Europe” on Monday, Sven Jari Stehn, chief European economist at Goldman Sachs, said the Fed’s latest position “should [ECB] The Governing Council is more confident that it can start reducing PEPP purchases later in the year. “

The ECB introduced a new bond buying program in the wake of the coronavirus pandemic, called the Pandemic Emergency Purchase Program. This is currently expected to last until March 2022 and total 1.85 trillion euros ($ 2.2 trillion).
“We believe they will drop the PEPP purchase program at the September meeting ahead of the fourth quarter,” Stehn said, while adding that the Board of Governors was “in no rush to follow the Fed in stepping up. the release schedule ”.

Goldman Sachs last week estimated Eurozone GDP growth of 5.4% this year, above consensus, thanks to progress in immunization programs.

We have four fiscal reasons for believing that the return to fiscal consolidation will not be as brutal as after the GFC and during the eurozone crisis.
However, there are still fears that inflation will reach the desired levels for the ECB, despite the reopenings experienced by the various economies of the euro zone. This would therefore require continued support from the central bank, which uses inflation as its main objective.

Goldman only expects a “gradual rise” in core inflation to 1.5% in the fourth quarter of this year. The ECB’s mandate is to ensure price stability with an inflation target “close to but below 2%”.

More austerity?

The coronavirus pandemic also saw governments step up budget support and ease budgets – an approach that contrasted starkly with the austerity measures the euro area implemented following the 2008 global financial crisis.

This approach was possible because the 19 eurozone countries decided to temporarily lift the EU’s fiscal rules so that they had the opportunity to spend more and reduce the economic shock of the pandemic. However, the 19 nations are expected to discuss a review of the EU’s fiscal rules, seen by some as too restrictive and outdated.

“We expect that a version of the fiscal rules will be applied from 2023 … However, we have four fiscal reasons to believe that the return to fiscal consolidation will not be as brutal as after the GFC and during the crisis eurozone, ”Goldman Sachs analysts said in a note last week.

According to Goldman, they are: The expectation that the Green Party will figure in the next German government and demand a more flexible tax policy; the likelihood of higher tax revenues; growing calls in Europe for governments to focus on growth ceilings rather than strict debt rules; and the fact that the next EU funds will not be factored into the deficit and debt targets of euro area countries.

However, wrangling over future fiscal rules is expected to be tough with countries like Austria, Ireland and the Netherlands arguing for a return to a conservative fiscal path as the impact of the pandemic is over.

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