HSBC Say Austerity Pressure is Off

HSBC have said that governments in the euro area have benefited from the European Central Banks’ (ECB) Quantitative Easing (QE) programme, and expect fiscal expansion next year, in their latest report on the euro area.

Due to the EUR 60 billion per month asset buying QE programme, interest payments on government bond yields are almost 25% lower  in the euro area, than what was expected a year ago, according to the bank.

HSBC estimate that as much as 275 basis points have been taken off Portuguese 10 year yield spread, versus the price of German bonds, since the beginning on 2012.

The same model that was designed by HSBC, has also assessed that 135 basis points has fallen from Italian 10 year gilts, a further 120 base points from Spanish bonds, and 25 bonus points from France.

Governments to Spend More

Governments are set to spend the gains that they have made from interest payments HSBC believe.

Next year, a net fiscal expansion of 2.3% is predicted for Italy, with the French spending at a slightly more conservative rate of 0.9%, compared to 2015.

In Germany, public spending is set to increase by 4%, and HSBC argued in their report that QE has ended a debilitating cycle of austerity, lower growth, and the needs for more austerity, particularly for the most indebted countries.

The European Commission has also been turning a blind eye to fiscal ‘misdemeanours’, with the increase of spending. If Commission rules were more stringently enforced, then only Germany would be within fiscal terms.

The Stability and Growth Pact, which applies to all European Union countries, states that the budget deficit must be no greater than 3% of GDP.

HSBC revealed in their report that they believe the Commission is being lenient due to mitigating factors, such as the surge in asylum applicants, increased threats of terrorism, and the rise of political parties that can be viewed as being anti-European.

HSBC Positive About Increased Spending

As opposed to fiscal profligacy that led to a sovereign financial crises, the escalation of government spending will be a step forward in the short term, the bank opined. 

Exports and investments are still being weighed down by weak global growth, HSBC said that further austerity would damage European economies.

The report read: “The fiscal and monetary policy mix so far has actually been more favourable than in the UK, US, or Japan, during their QE periods. Debt sustainability is looking better. It is also welcome that, for once, a good chunk of the increased spending is in Germany.”

Money Should be Used Wisely

Any increases in government spending should ensure that there is a spur to private sector activity, and business investment.

Political factors may hinder that, as HSBC said that due to the unpopularity of many governments, they have simply spent more money, without concentrating on creating growth.

As public sectors grow, there is clear sign of tax exhaustion, and there is little help that is arriving to boost domestic demand in the euro area.

Government debts as a result of this are likely to climb higher, and that could lead to increased vulnerability in the event of a change of policy from the ECB.