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ENERGY SHOCK NOT A MAJOR CHALLENGE TO EURO ZONE FISCAL POLICY

Energy prices look set to remain high for the rest of this year, regardless of whether Wednesday's optimism about a U.S. Iran deal proves justified, but Goldman have a note out saying this should not be a significant challenge to fiscal policy in the euro zone.

That could be part of the picture explaining why stocks are looking through the worst news, and bonds are focussing on the inflationary impact rather than the growth hit from the war.

Goldman make a few points, and perhaps most importantly, they say fiscal balance sheets in Europe are much more solid than they were in 2021's energy shock with average government fiscal deficit of 3.4% of GDP in 2025 compared to 5.6% of GDP in 2021.

On top of that, they say, and maybe this is a hostage to fortune, they think this energy shock is likely to be more temporary, while the start of the full-scale war in Ukraine led to a permanent loss in Russian energy supply.

As well, they say the fiscal measures planned so far to deal with the energy shock are temporary, targeted, and amount to significantly less support than in 2022.

Clearly higher interest costs on government debt isn't a good thing especially the case in France and Italy, which have around 10% of their debt indexed to inflation, but Goldman say "higher inflation should be enough to offset higher interest payments and lower growth".

(Alun John)

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