Eurozone outlook improves as austerity eases says Berenberg

The decline in austerity will be one of the biggest contributors to growth in the Eurozone, according to a report published by Berenberg on Friday. The IMF has forecast that the fiscal drag on the Eurozone, due to austerity policies, will fall from 1.3 per cent in 2011-13 to 0.3 per cent in 2014.

Berenberg sees the Eurozone is in a better condition than economies such as the US and the UK with the IMF forecasting deficits of 2.5 per cent of GDP next year and a gross debt ratio of 96.1 per cent.

Although Berenberg stress the fact that "better is not good enough," they draw optimism from four principles which have become universal across the Eurozone:

  • The agreed deficit targets are being respected.
  • The focus is shifting from tax increases to spending cuts.
  • Countries are no longer relying on emergency one-off measures.
  • Pension and labour market reforms are being introduced to tackle fiscal problems beyond 2014.

A shift from tax rises to spending cuts was said to ease some of the impacts of austerity. Berenberg notes that spending cuts are on average politically more unpopular, yet due to their effects in reducing large and wasteful public sectors and their less harmful effects to the private sector than tax rises, they prove more effective in the long run.

As a sign of progress Berenberg point to the fact that even the socialist administration of Francois Hollande is seeking to cut the French deficit through a budget made up of 85 per cent spending cuts. Meanwhile Portugal, Italy and Belgium are cutting taxes which should ease some of depressive effects of austerity.

As conditions are gradually improving in crisis countries, the situation in Germany remains strong. The German government is planning a structurally balanced federal budget. Strong tax revenues and spending cuts, combined with low borrowing and a return of growth are creating a stable fiscal environment.