By Francesco Canepa
FRANKFURT (Reuters) – Just as Britain and the USA come under pressure from investors frightened about growing debt and sticky inflation, the euro zone appears to be largely escaping the market’s wrath — even when the explanations behind that calm should not all nice.
The UK and U.S. governments have seen their 10-year bond yields, a sign of how much it costs them to borrow, rise by 100 basis points since September as investors fret in regards to the fiscal plans of Britain’s Labour government and Donald Trump’s incoming U.S. administration.
Germany, the euro zone’s largest economy and financial benchmark, has seen its own borrowing costs rise lower than half as much despite a looming general election that would see big gains for the far right.
Investors are taking comfort from a much lower government debt-servicing burden in Berlin than in Washington or London.
“Germany is the one major economy world wide that may afford to issue more debt to finance public spending in the event that they resolve to,” Francesco Castelli, the pinnacle of fixed income at asset manager Banor in London, said.
But even for debt-laden Italy and France the rise in bond yields has been much smaller than in Britain or the USA.
This might partly reflect some signs of fiscal restraint in Rome and in Paris, where a recent government has vowed to get the general public funds so as.
But there are also less positive explanation why lenders should not charging more to lend to euro zone governments.
Economic growth within the bloc, and particularly in Germany, is stuck in low gear, courtesy of upper energy costs and a scarcity of competitiveness in key sectors resembling cars and technology.
That is prone to push down inflation, keep the economy stagnant and force the European Central Bank to chop rates of interest quickly in the approaching months.
Against this, the U.S. economy keeps defying expectations with its brisk growth, and economists have gotten increasingly convinced it might be destined for a structurally higher neutral rate of interest — the extent of borrowing costs that keeps the economy in balance.
Protectionist policies from the incoming Trump administration could even add to U.S. inflation by making imports costlier, forcing the Federal Reserve to maintain rates of interest high for longer and putting upward pressure on borrowing costs.
The Fed is just seen cutting its key rate just a couple of times at most over the subsequent 12 months, which might still leave it at around 4.0%
The central bank for the 20 countries that share the euro is against this seen reducing its policy rate 4 times over the identical period, easing it to 2.0%.