New EU fiscal rules may crimp member states’ investments in strategic areas

Investing.com — A revamped European Union fiscal framework could restrain the budgets of many of the bloc’s member states to make critical investments, analysts at Bank of America Securities argued on Friday.

The restructured rules, which came into force on April 30 after they were agreed upon by lawmakers in Brussels earlier this year, have been widely viewed by economists as a push to persuade the EU’s 27 member governments to rein in expenditures and ratchet down debt.

This week, the European Central Bank warned that high debt piles may crimp the ability of European countries to address shocks from geopolitical tensions or elevated interest rates. This vulnerability, the ECB added, could have “negative financial stability effects” and worry investors, particularly ahead of a host of elections across the EU this year and next.

The ECB itself has itself said it may not allow countries who do not comply with Brussels debt-busting recommendations to participate in its as yet untested bond purchasing program.

But the BofA analysts flagged that under the EU’s reformed fiscal framework “the hands of national fiscal policy are likely to remain tied in the areas of critical investment” for the region, such as green energy, defense, and digitalization.

As a result, they noted that the investment gap in these strategic areas will likely stay “untouched” at the EU-wide level.

“Ideally, a shortfall can become an opportunity: ‘more Europe’ should step in to fill the gap,” they wrote. “From a political standpoint, the bar is high. But exogenous geopolitical events (including U.S. elections) may push for earlier action (or at least we hope).”

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