In January, the European Union recovers the next fiscal rules -the obligation for countries to adhere to deficit and debt ceilings- after the three-year hiatus in which they have remained suspended so that the Member States could face the economic consequences of the pandemic, first, and of the war in Ukraine and the energy and inflation crises, later. However, the return to fiscal consolidation will be different from the one that occurred after the last financial crisis, which led some of the euro economies to a lost decade. The clearest evidence is in the proposal for a revision of the Stability Pact that the European Commission has recently presented and that offers more flexibility to governments with gradual and personalized adjustment goals.
Under this new umbrella and with the boost that the Next Generation Funds will give to public investment projects and current spending, European fiscal policy will continue to be “lax” throughout this decade. A period in which equilibrium interest rates will be higher and in which inflation will continue to put pressure on consumers’ pockets. It is the panorama drawn by Goldman Sachs, the largest investment bank in the world, in a report that has just been made public. This horizon of higher financing costs will have an obvious impact on households with a mortgage, but also on those who need access to a loan to be able to buy a home, as well as on companies and the State itself.
If in the decade after the financial and debt crisis Europe’s objective was consolidation -even at the risk of depressing demand and making growth anemic-, the outlook is different between now and 2030. After the pandemic and the Russian invasion of Ukraine, expansionary fiscal policy has propped up the region’s economy by “replacing income, guaranteeing loans, and capping prices” through temporary measures that have simultaneously raised the deficit and debt. That support but, above all, the energy shock and the rise in the prices of some raw materials triggered inflation and forced the European Central Bank (ECB) to apply the most accelerated rise in rates since the creation of the euro to damage the front.
In the US entity considering that, although the level of spending will not be the same in the coming years as at the worst moment of the pandemic or immediately after the war, the legacy of both shocks will be “a more lasting increase” of the same. With the 750,000 million euros of the Next Generation program, the urgency of launching investments related to energy security and defense, and the possibility that fiscal policy “be used more frequently for the cyclical one after the precedent of the last few three years”, at Goldman Sachs they do not rule out a structural change in the amount of public spending and investment in Europe compared to the previous decade (2010-2020).
The accelerated rise in financing costs for families
Indications of all of the above are likely to be higher nominal growth, harder to contain inflation, and higher equilibrium interest rates. From CaixaBank Research they explain that the equilibrium or natural rates are those that place the growth of the economy at its potential and that, at the same time, stabilize inflation. Above them, investment demand is insufficient and activity and prices are depressed, and below them, investment demand overheats activity and generates inflationary pressures. At the domestic level, the problem with this scenario is that after a prolonged period with the price of money at historic lows, families with mortgages are already seeing how the Euribor (the indicator to which the vast majority of type loans are referenced or variable ) could close this month slightly below 4%, almost three and a half points above what it was just a year ago.
Concern about upcoming revisions is evident. So much so that in the first two months of the year households have amortized 4,800 million euros, according to figures from the Bank of Spain. In February of this year, the outstanding mortgage balance fell by 0.40%, by 2,037 million, to stand at 506,157 million euros, the lowest level since June 2021. At the same time, the amortized amount is the second highest since May 2015, after January, when the balance was reduced by 2,763 million. However, not only variable-rate mortgages become more expensive, but also the offer of fixed-rate loans by banks.
The result of all this can be seen in the real estate market, which registers falls in both home sales and mortgages. According to the figures handled by the General Council of Notaries, 27,192 mortgage loans were signed in March, 26.4% less than last year. Only in the third month of the year, purchases and sales were spent by 11.7% and housing prices fell by 2.6%, according to the same source. It is foreseeable that in the face of a scenario such as the one drawn by Goldman Sachs in its report, these figures could cool down even more in the short or medium term.