A spectre is haunting Europe: the threat of bond-market contagion.
asserted
spectre → haunt → contagion
France’s fiscal failures are the source, and now even countries that were supposedly improving their finances are in danger.
asserted
that → improve → danger
Italy, for one, has managed to cut its fiscal deficit, but its macroeconomic recovery is very sensitive to rising yields on its sovereign debt — and hence its borrowing costs.
asserted
recovery → manage → debt
Years of fiscal mismanagement will cause its debt to hit 139 per cent of gross domestic product this year.
asserted
debt → cause → product
Trouble is brewing beyond the eurozone as well.
asserted
Trouble → brew → eurozone
Romania, going through another bout of political turmoil after failing to install a government on September 30, has yields of about 7.3 per cent.
asserted
Romania → go → cent
We’re still some distance from a repeat of the 2010-2012 eurozone crisis.
asserted
We → ’re → crisis
But there is a reason the European Union has for a decade lurched from one emergency to another, and why every moment of stress — the 2022 loss of Russian gas, the Iran war, France’s overspending — threatens to push it over the brink.
asserted
moment → be → brink
It has consistently failed in good times to prepare for the bad.
asserted
It → fail → bad
When you dig deeper, irresponsibility is rife.
asserted
irresponsibility → dig → ?
Italy is actually running a budget surplus and Giorgia Meloni’s government has stayed in power for nearly four years, giving the notoriously unstable republic an unprecedented spell of stability.
asserted
government → run → stability
But her government is still demanding that EU rules are bent to let it spend more.
asserted
it → demand → more
Countries that rack up half-decent numbers reckon that gives them licence to be irresponsible for the next few years, like dieters who think a 10-minute walk allows them to wolf down a bucket of fries.
asserted
them → rack → fries
Its populist billionaire leader has announced a budget that would massively increase the deficit to 3.5 per cent of gross domestic product from 2.1 per cent in 2025.
asserted
that → announce → 2025
Naturally, its bond yields have reached levels not seen since 2022.
asserted
yields → reach → 2022
Prime Minister Pedro Sánchez has called fresh elections, although he’s trailing badly in the polls.
asserted
he → call → polls
He has run three successive minority governments now, and perhaps hopes he can pull off an unlikely fourth win.
asserted
he → run → win
The country is blessed by culturally compatible Spanish-speaking migrants, a climate that’s perfect for renewable energy and favourable growth numbers as a result.
asserted
that → bless → result
But there’s been no real fiscal consolidation, even though the headline deficit has fallen.
asserted
deficit → fall → ?
The OECD points out that Spain’s structural deficit – what the deficit would be if the country grew steadily at its highest sustainable rate – isn’t declining.
asserted
country → point → rate
There’s nothing in the tank for when the engine begins to sputter.
asserted
engine → ’ → tank
Spain typifies Europe’s problem.
asserted
Spain → typify → problem
In times of crisis, countries look to the rest of the EU for help.
asserted
countries → look → help
In happier times they bank nothing, for themselves or the bloc.
asserted
they → bank → themselves
Instead of being a source of strength in a struggling continent, Spain has sought to leave to others the tough job of dealing with markets, suggesting a European-level borrowing facility that could raise money on its behalf.
uncertain
that → struggle → behalf
Sánchez’s attempt to introduce rent controls — which was defeated in parliament, precipitating his call for new elections — is typical.
asserted
which → introduce → elections
The housing shortage is a real problem, but his response was poorly thought through populism, including the automatic renewal of rental contracts.
asserted
response → think → contracts
What’s needed is a genuine attempt to fix the problems that have turned Spain from a house building champion, adding 800,000 a year before the financial crisis, into a NIMBY paradise.
asserted
that → need → paradise
Financial markets look at Europe and dislike what they see: a continent that hasn’t come to terms with its ageing population and the straitened finances that inevitably follow.
asserted
that → look → population
They see patches of growth — Poland, Spain — but no sign this is being matched by the fiscal reforms that will make this growth sustainable.
asserted
growth → see → reforms
Politicians are unable to tell electorates the truth about the necessary sacrifices, and voters refuse to believe it even when they’re told.
asserted
they → tell → it
Investors baulk at populists’ insincere and undeliverable promises, and the instability they create.
asserted
they → baulk → promises
Europe is an ageing continent that refuses to grow up.
asserted
that → age → ?
Above all, they see a continent-wide unwillingness to embrace the welfare and immigration reforms that might prevent stagnation.
uncertain
that → see → stagnation
Many countries are refusing to build new homes, too, even though housing costs are crippling growth and alienating the young.
asserted
costs → refuse → young
No wonder bond markets are pushing yields higher.
asserted
markets → push → yields
Europe is an ageing continent that refuses to grow up.
asserted
that → age → ?
It’s spending as if it’s in the first flush of youth, without the earning capacity to justify that.
asserted
it → spend → that
This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
asserted
column → reflect → board
The Aporia
