Europe | Green light

Summary

Of the three key elections for the future of the Eurozone in the coming years—the German general election and the presidential elections in Italy and France in the first half of 2022—the first ended last week with the appointment of Olaf Scholz as chancellor.

Key points

• Key points:
• At the helm of a red-green-yellow coalition, the new German government faces key challenges with implications for the rest of the region. The fourth wave of the pandemic, though stabilized, is still at peak levels. This should not significantly affect the recovery, which depends more on unblocking bottlenecks globally than on the ups and downs of domestic demand.
• Funding and the achievement of climate commitments is a tough challenge in a scenario with a nuclear blackout and the “no higher taxes” commitment demanded by the Liberals.
• Investments may be financed by using the room for maneuver of the 2022 budget (not yet subject to zero deficit rules) and off-balance sheet vehicles, through public banking or capital injections in public corporations.
• This departure from fiscal rules may influence the European debate, pending the modification of the Stability and Growth Pact. The debate may end with limited reforms in debt rules, substantially maintaining national fiscal discipline but tempered by investment programs along the lines of the NGEU, which is more closely controlled by the EU.

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