While Germany’s Green Party has ultimately consented to the increase in military and infrastructure spending, Germany has scope to add debt. Britain, France and Spain do not and as such policy debates in the major European countries are focusing again on fiscal reform. They are now part of a growing trend of European countries being forced int austerity, at a potentially very unpopular political cost.
In the U.K., Labour is enacting deep cuts to disability payments — something unpopular with much of its party — but that will have a material impact on the U.K.’s fiscal outlook. Since COVID-19 disability insurance payouts have rocketed — owing to the ease of the appraisal process, the rise in mental disability in the post COVID period and the tendency of some to substitute disability social welfare for other formed of state aid (that have been cut back).
One in ten people of working age in the U.K. are claiming benefits. The rise in disability payouts has also skewed the U.K. labor market with of young workers opting out of the labour market and this has hurt growth and productivity. On March 18, the U.K.’s work and pensions secretary Liz Kendall, in a “Pathways to Work” green paper, announced a series of measures that will make future disability payments harder to claim, soften conditions for those with severe physical disability and measures to incentivize people to return to work.
While the measures were criticized by charities and some on the left of Labour, they can be taken as evidence of Labour’s determination to manage the budget and to bolster growth.
Also, In France the prime minister Francois Bayrou has recently re-opened the debate on the reform of pensions by having it analyzed by a conclave of social partners (for example, unions), but he has warned that the rise in the pension age from 62 to 64 will not be reversed. Pensions and social welfare costs are one of the largest drains on French government finances and an area where France is well ahead of its EU peers in terms of its generosity to its citizens.
Spain for its part is facing growing scrutiny over its relatively small level of defense spending (1.3% GDP) and poor combat readiness. Prime minister Pedro Sanchez has tried to bargain for cybersecurity spending, climate related spending and counter-terrorism to count as part of government sending but this has been rejected by EU partners. Sanchez has a very thin margin in parliament and will soon have to try to vote through a budget for 2025.
In summary, there is now a trend toward fiscal consolidation in the world economy and arguably a passage towards central banks as the underwriters of growth. In Europe the political euphoria around the Union’s move to bolster its defenses is giving way to reality around hard financial choices. In most European countries, politically unpopular fiscal questions will be revisited as we move through 2025.
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