Euro area gross government funding needs larger than implied by the Stability Programmes

As part of the EU fiscal surveillance framework, in May member states submit to the European Commission their medium-term budget plans (the Stability Programmes). These plans permit both a comparison of governments’ proposed fiscal stances across the EU, and an estimate of government bond issuance.

Recently, our Rates Strategy team published issuance estimates of medium- and long-term Euro area government securities and ECB purchases of such securities in 2018 and 2019. Based on these estimates, the team showed that, starting from January 2019, the ECB will continue to absorb a significant amount of duration risk in Germany, but it will provide less support to government bond markets in France, Italy and Spain. More specifically, the ECB will only buy 21%, 17% and 25% of gross issuance of medium- and long-term securities of these governments respectively, down from 35%, 26% and 35% in 2018.

We expect more sizeable gross government funding needs in the Euro area countries than those implied by the medium-term budget plans (the Stability Programmes) that member states submitted to the European Commission in May.

This reflects our recently updated fiscal and growth forecasts. In particular, we expect larger fiscal deficits (or, in some cases, smaller fiscal surpluses) than the Stability Programme projections (and, hence, higher gross funding needs) for all Euro area countries for which we produce the relevant forecasts. Our GDP growth forecasts are close to those projected by EMU member states in the Stability Programmes.Differences in projected fiscal policy stance and, by implication, government funding needs are particularly sizeable in the case of Italy, where uncertainty on the 2019 budget law is also elevated.

We also compare gross funding needs in Euro area countries with those in the US and Japan. Reflecting a divergent fiscal policy stance in these jurisdictions, net new funding needs are a larger share than gross funding needs in the US and in Japan than in Euro area countries.