The Greek economy will record economic growth rates higher that the Eurozone average this year and in 2018, Moody’s Investor Service said in its “Sovereigns — Euro Area 2017 Outlook: Stable Outlook Amid Subdued Growth And Rising Political Risk”, report released on Thursday.
The 2017 outlook for sovereign creditworthiness in the euro area is stable overall, reflecting the likely stable but subdued real GDP growth, the mostly neutral fiscal stance and a modestly declining debt burden, Moody’s Investors Service said.
On average, Moody’s expects the euro area to grow by 1.3 pct in 2017 and 2018, although growth rates will vary from country to country. Trade growth from outside the euro area is likely to remain weak, and rising protectionist sentiment in many advanced economies, including the US, is likely to place further downward pressure on trade volumes. Some smaller countries — such as Ireland, Luxembourg, Malta and Slovakia — are likely to record stronger growth of above 3 pct in both years. Others, such as Greece, Spain and Slovenia will grow more slowly but still exceed the euro area average. The euro area’s largest economies — Germany, France and Italy — will continue to grow at well below 2% each year.
“Our outlook for sovereign creditworthiness in the euro area in 2017 is stable overall,” said Sarah Carlson, a Moody’s Senior Vice President and co-author of the report. “Economic growth dynamics in the euro area in 2017-18 will be broadly credit neutral and debt metrics have stopped deteriorating for most, though not all, euro area sovereigns. However, rising political and policy risk in some euro area countries could undermine ongoing reform efforts.”
For many, if not most, countries in the euro area, government balance sheets remain materially weaker than they were before the crisis. As a result, the balance sheets of most euro area sovereigns are unlikely to strengthen significantly before the next economic downturn.
Debt metrics have stopped deteriorating for most, though not all, euro area sovereigns, a further factor underpinning our stable outlook for the euro area in 2017. Nevertheless, many countries are constrained in their ability to take on significant amounts of new debt without materially damaging their fiscal strength.
A wide range of political parties has emerged in many euro area countries on both the right and the left of the political spectrum to challenge the established policy consensus. Moody’s base case assumption is that few of these anti-consensus parties are likely to form governments, but most have the potential to materially influence the political debate by making it more politically costly for centrist parties to advocate increasingly unpopular economic or fiscal reforms. The 2017 election cycles in France, Germany, the Netherlands and perhaps Italy will reveal the extent of the support for these emerging parties and movements.
While it is unusual for changes in government to have material credit implications, the far-reaching nature and ubiquity of the political shifts under way means that the impact of the upcoming elections could be more significant from a credit perspective than is usually the case.
Although the rising political, and hence policy uncertainty, in some countries has not yet adversely affected the ratings outlook for the region, it could lead to far-reaching political changes that could challenge the governance and even the continuity of the euro area.
As things stand, Moody’s thinks that the likelihood of further departures from the EU or euro area is very low. But unexpected electoral gains by parties with anti-EU or anti-euro policies, or other unanticipated events which Moody’s thinks raise the probability of exits, would require a reappraisal of this risk.