Austerity over in Europe? Here’s what that means for the region

Economists and investors worry about Europe’s debt profile and a lack of fiscal policy in the euro zone.

“Europe is at a crossroads. It needs to make a decision whether it wants closer union and closer fiscal policy. At the moment they have a common currency but not a common fiscal policy,” Gallo said, adding that “the problem of austerity intersects structural imbalances which are at the heart of the euro zone” such as the lack of a common fiscal policy.

“All countries benefit from being in the euro zone but some benefit more than others. The low euro benefits the likes of France and Germany whereas the common market allows for economies of scale for everyone,” he added.

Others warn that Europe needs to “fix the roof while the sun is shining” (to quote former U.K. Finance Minister George Osborne) especially when the region is continuing to enjoy the last gasp of low interest rates thanks to the European Central Bank’s quantitative easing program, expected to finish at the end of this year.

There are concerns European governments, keen to move away from austerity, unpopular reforms, placate voters and stay in office, are not heeding that warning.

“Most European governments are trying to push higher spending and larger fiscal imbalances thinking that the current environment of low rates and high complacency will last forever,” Daniel Lacalle, chief economist at Tressis Gestion, told CNBC via email.

“The euro zone countries have saved more than one trillion euros in interest expenses due to the ECB quantitative easing but they have spent it all. The end of austerity happened a few years ago, and what we are seeing is that almost all euro zone countries are spending above the 2007 levels, so raising spending further is the recipe for another debt crisis in the near future.”


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