„What remains to be done is some harder decisions on tax rises or expenditure“
Mr. Parker, Mr. Coulton, government debt is rising significantly in many countries, such as the USA. Do you think US fiscal policy is too expansionary?
Parker: We downgraded the US from AAA to AA+ last year and this was primarily driven by the detoration in public finances. This was quite substantial and rapid. 2024 we are expecting the US to run a budget deficit of about 8% of GDP. This is an extraordinary level without a recession or a war. If you look at long term projections there is no let up over the coming decades.
In Europe, we also discuss about high deficits of some states, for example France and Italy. How do you assess the situation in Europe?
Parker: There has been some fiscal consolidation since the pandemic. But some of the easier consolidation such as measures to cushion energy prices has already rolled off. So what remains to be done is some harder decisions on tax rises or expenditure. In many countries, there is obviously a difficult social or political environment to make those painful cuts. And then there is also the issue of so-called fiscal multiplier, where any net tightening in fiscal policy is going to spill over to weaker GDP growth, which then lowers tax revenues.
But at least the rate cuts of many central banks help the governments to consolidate their households.
Parker: Yes, but in the short term the average interest rate on the stock of government debt will continue to rise. Debt is maturing and needs to be refinanced in the markets. And current rates are still higher than when it was been issued at very low rates.
Let's have a look at Germany. Would it be better for Germany's future solvency to adjust their fiscal rules to boost investments and foster growth?
Parker: Well, Germany is triple A with a stable outlook. So obviously the rating can't go higher. From a public finance perspective, running a small budget deficit and having declining government debt is something that tends to support credit worthiness. But from a growth perspective, investments in Germany are low. So having a stronger public investment is something that probably strengthens growth and therefore would generate a strong return.
Coulton: The German economy is quite reliant on external demand. So boosting domestic demand would be important. It is not only the high saving ratio of the households that is crimping domestic demand. Another reason is the low labour productivity. More investment could boost that productivity.
Why is the productivity in Europe lower than in the US? Is it because the United States are more successful in fields like digitalisation and Artificial intelligence?
Coulton: One thing is that the venture capital industry is bigger in the US. There are also more startups. But I also think that some recent divergence is due to the very strong demand in the United States. When demand is strong, firms just have to squeeze extra output from their existing workforce. Firms in the US have been struggling to fill positions in recent years.
Former ECB president Mario Draghi suggested common Euro bonds to boost investments and productivity in the Eurozone. What is your opinion on this topic?
Parker: It is not our expectation that there will be a new envelope of EU borrowing. We think it is more plausible that some of the existing borrowing related to the Next Generation EU bonds that mature will be refinanced. We see significant political opposition to greatly expanding EU borrowing capacity.
But what would the effects be if there were to be common Euro bonds? For example, on the ratings of the states.
Parker: : I don't think it would have a big impact on the ratings. But obviously this depends on the exact parameters the bonds would have. And if we look back to the Next Generation EU program, then it provided a supportive environment, but it didn’t itself lead to immediate upgrades in the different countries. The other thing to bear in mind is that this is not a magic money tree if the EU is borrowing. The EU is made up of different countries, which would need to repay that debt out of future EU budget contributions. So the contingent liabilities of the constituent governments within the EU would be increasing at the same time.
We don't really share the worries that the Fed articulated about the labour market.
Brian Coulton, Chief Economist Fitch Ratings
Let's talk about monetary policy. The ECB has cut rates in October. What do you expect from the ECB in the upcoming months?
Coulton: I think we will see one additional cut this year and four cuts in 2025. There has been some fairly decent news on some of the wage measures in terms of wage growth coming down, and we start to see unit profit slow down a bit. Inflation news have recently often been better than expected and the growth perspective is on the downside. Also, the labour market is cooling down.
The fed has surprisingly started their easing phase in September with a rate cut by 50 basis points. Was this the right decision?
Coulton: We thought the data justified a cut by 25 basis points. We don't really share the worries that the Fed articulated about the labour market. It is true that US unemployment has been rising, but it wasn't associated with declining jobs. We have had a strong recovery in immigration in the US and that boosted the labour force. But they have not all got jobs right away. This is a less worrying dynamic than people losing their job.
The interview was conducted by Martin Pirkl.
