Forex Flash: Eurozone fiscal deficits still high, though waning – Goldman Sachs

While official Eurostat deficit data for 2012 will not be published for another two months, tracking estimates of deficits in Italy, Spain and France show a continued decline, albeit falling short of government targets. As the cyclical picture deteriorated during 2012, the European authorities are likely to accept these misses to some extent.

However, “part of the shortfall also reflects fiscal slippage and, as a result, the 2013 budget targets will likely remain more ambitious than our current fiscal forecasts for Italy, France and Spain.” notes the Economics Research Team at Goldman Sachs. While smaller than in 2012, the increase in government debt in the largest Euro area economies (other than Germany) is likely to be significant in 2013.

On our projections, “debt should peak at relatively high levels within the next two or three years in Italy, France and Spain. Given expected improvements in primary balances, government debt should then start to decline as a share of GDP.” the team writes. But the headwinds from weak growth and weak inflation (as these economies rebalance externally by improving price competitiveness) imply that further fiscal austerity – over and above existing plans – will be required to satisfy European fiscal rules. Given the political challenges involved in maintaining substantial primary government surpluses in the medium term, risks are for slower rather than faster public debt reduction.