•The latest Stability Programs show that euro area countries have more ambitious plans
to reduce the budget deficits in coming years, probably caused by the markets’ limited
tolerance for fiscal sinners. To us, in most countries, the government plans are not likely
to be sufficient to achieve the targeted deficit reduction by 2012-2014, due to either
overly optimistic growth assumptions or overly vague consolidation measures.
• While the big fiscal sinners in the euro area plan to start tightening this year, the small
fiscal sinners plan to start tightening in 2011. With a modest fiscal easing in the euro
area on average in 2010, the ECB is unlikely to provide relief to countries that start the
fiscal tightening this year.
•In our view, countries that currently face heavy market pressures do not have much room
left for action, apart from implementing the planned fiscal tightening quickly, which
probably would cause further downside to economic growth. Hence, external support for
Greece and perhaps other small countries may eventually be required to soothe markets,
and such help probably in practice would have to be led by the other euro area members
(see page 2, Jürgen Michels and Giada Giani).
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