Rathbones expects tough 2020 for Eurozone

Rathbones expects tough 2020 for Eurozone

The Eurozone will struggle during 2020 as policy makers continue to ignore the need to increase spending to stimulate economic growth, according to Noelle Cazalis, a bond fund manager at Rathbones.

While the UK and US governments are likely to increase spending in 2020, and US growth has already been stimulated by interest rate cuts, neither approach is currently being pursued by the Eurozone.

The European Central Bank has already cut interest rates deeply into negative territory.

The ECB president Mario Draghi stood down in October 2019, making clear towards the end of his tenure that he felt central bankers could do no more to stimulate Eurozone growth, and he urged governments to increase public spending. 

Ms Cazalis said: “Next year will likely be a challenging one for Europe. The ECB is running out of steam, yet its appeal for governments to take the strain with fiscal stimulus has largely been ignored. We will be watching for signs of stimulus, especially from Germany, but the chances look slim.”

Germany has a policy that it cannot run budget deficits in normal times, while benefitting from the fact that the euro is  weaker currency than the one Germany would have if it had its own money.

This places almost all southern European countries at a disadvantage relative to those in Northern Europe, when it comes to exporting, since the euro is a stronger currency than countries like Italy would have if they had their own money.

Because Germany runs a budget surplus, it is the Eurozone country with the greatest capacity to increase spending, but has a policy specifically precluding it from doing so.  

Countries that are members of the Eurozone are constrained from running substantial budget deficits. This has resulted in the European Central Bank seeking to spark growth through interest rate policy.

Ms Cazalis believes that with this method of targeting growth seemingly not working, and governments not able or inclined to increase spending substantially, the outlook for growth in the Economic block is weak.

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