By Eric Peters, CIO of One River Asset Management
The ECB put out a report in June that called on Eurozone nations to fiscally tighten by 3% of GDP to address fiscal burdens sparked by ageing populations, defense spending needs, and climate change. That would surely spark a deep recession, perhaps depression. It went on to suggest an additional 2% annual tightening would be required to return the debt/GDP ratio to the self-imposed 60% limit by 2070. This would spark depression. Even the ECB admitted their suggested policy would present challenges.
“There is no room for complacency, as the longer the adjustment is postponed, the larger the eventual adjustment cost will be,” the ECB warned, its proposed 5% of GDP fiscal tightening amounting to an estimated 720bln euros per year. Then in September, Draghi issued an EU competitiveness report, warning of an existential crisis: “We have reached the point where, without action, we will have to either compromise our welfare, our environment or our freedom.” Draghi called for a 4.7% of GDP annual fiscal expansion to save the EU.
