No eurozone retrenchment until 2011, says Fitch

It will be 2011 before a strong financial retrenchment will take place in the euro area, according to Fitch’s latest report on sovereign credits. The report deals with the rate of fiscal consolidation thus far, the impact of ageing populations on eurozone finances, and the benefits of joining the euro.

The report states that thus far, significant fiscal tightening has been limited to peripheral members such as Greece, Spain, Portugal, and Ireland, but this is likely to change in 2011 as all member states have given a strong political committment to a material strengthening of the EU stability and growth pact.

The report also discusses the longer-term impact that ageing populations in Europe will have on public finances, highlighting the fact that age-related spending in the eurozone is likely to rise from its current level of 5% of GDP to around 30% of GDP by 2060, with some countries seeing the rate go even higher. Such a sharp increase in age-related spending brings into sharp focus the need to balance public finances in the near term and provide a sustainable base for the future, says Fitch.

Despite the difficulties inherent with the eurozone’s “one size fits all” monetary policy for a set of diverse regional economies, the report states that for small European economies with sound public finances such as Estonia, which will become the 17th euro member in January 2011, the benefits still far outweigh the disadvantages.