© Reuters. SUBMIT PHOTO: Italian Prime Minister Giorgia Meloni and German Chancellor Olaf Scholz attend to the media throughout their conference at the Chancellery in Berlin, Germany, November 22, 2023. REUTERS/Fabrizio Bensch
By Stefano Rebaudo
(Reuters) – Brace yourself for a turbulent 2024 as the calm in bond markets of the most indebted euro zone countries might be shattered by strict post-pandemic budget rules. Experts are concerned that the current tranquility could be disrupted by fears about debt sustainability and rising interest rates.
Germany’s budget crisis is expected to result in tighter financial policy in 2024, putting pressure on less wealthy members of the bloc to manage their finances more effectively. This shift could reverse the trend that has seen premiums paid by investors for the bonds of euro zone governments over benchmark Germany decrease for indebted economies like Italy, narrowing the gap between Italian and German debt.
According to investment bank BofA, Italy’s large debt burden puts it at risk of debt sustainability issues, cautioning that the euro area must avoid repeating the mistake of imposing overly tight fiscal and monetary policies, which could threaten the resilience of peripheral economies.
As EU financing ministers work on revamping the Stability and Growth Pact, which limits deficits to 3% of GDP and debt to 60%, a political agreement may be reached as early as next week, but a final deal might not be struck until after the European parliamentary elections in early June.
The proposed changes have sparked tensions among member states, with some, like Italy, advocating for a more growth-focused approach, while others, led by Germany, are pushing for stricter debt reduction measures.
