De Guindos: Growing concerns over US budget credibility pose risks for the euro area

Brussels – And that’s two! For the second time in a few months, the Vice President of the European Central Bank, Luis de Guindos, has publicly questioned American power. “Market concerns over US fiscal credibility have risen on the back of persistently high fiscal deficits and have contributed to a steepening of yield curves,” he said at the Spain Investors Day. The number two at the Eurotower had given his first warning about the resilience of the US economy to ‘his own people,’ the ECB’s technical staff; now, however, he is warning a much broader audience: that fears over US public finances “may create risk spillovers from the United States to the euro area amplified by policy uncertainty and a depreciating dollar.”

Setting aside the financials, there is the issue of perception, warns De Guindos: if people start to consider that US debt is at unsustainable levels, the whole global structure risks collapsing. “Intensifying doubts regarding US fiscal credibility could trigger abrupt shifts in sentiment, with spillovers across asset classes and geographies,” de Guindos said. 

The United States is no longer a reference point, not only from an economic and financial perspective. De Guindos returns to the issue of tariffs, recalling how “the past year has brought major shifts in the international economic environment, driven by significant changes in US policy and the erosion of the multilateral, rules-based system which has long supported global trade and international relations.” But he points the finger at Donald Trump’s neo-imperialist policy: “The shift to a new paradigm – one where rule of law principles are challenged – reflects profound global uncertainties that are likely to persist.” 

All these developments have had “tangible implications for economic activity and financial stability in the euro area,” which must be addressed first and foremost through reforms. This is because these spillover risks from American weaknesses are compounded by EU limitations and delays: “Fiscal fundamentals in some euro area countries have also been persistently weak,” he warned. A valid warning, especially for Italy.