The first is the end of the European Central Bank’s (ECB) quantitative easing (QE) program, which Mario Draghi, the bank’s president, reminded the world in September “is not forever.” The massive monetary stimulus effort, which began in March 2015, has seen the bank purchase nearly €1.2 trillion in euro-denominated public-sector bonds, as of November 25, 2016.
According to Barclays, the stimulus has had a significant effect on eurozone countries’ debt-to-GDP ratios. Without QE, the bank calculates, Spain and Italy’s ratios would have risen by an “alarming” 12% from 2014 to 2016. As it happened, they rose by 5.3% and 4.5%, respectively. The monetary accommodation has allowed countries to ease up on fiscal austerityand put off structural reforms, Barclays writes, opening them up to the potential that “solvency concerns could re-emerge, sovereign interest rates quickly rise above the average funding costs, and the 2010-11 adverse market dynamics could return.” (See also, The Week Ahead: November 28-December 2, 2016.)
The second source of concern is U.S. President-elect Donald Trump’s potential insistence that North Atlantic Treaty Organization (NATO) allies meet the treaty-mandated military expenditure target of 2% of GDP. Few countries currently do so; only Greece and the UK consistently joined the U.S. in meeting the target from 2009 to 2015.
Few NATO members meet spending goal of 2% of GDP (2009-2016)
Source: NATO, July 2016. Notes: based on 2010 prices; 2016 figure is estimated; NATO has 28 members, but Iceland lacks a standing military.
According to Barclays, the 22 countries that are members of both the European Union and NATO collectively spend just 1.3% of GDP on defense, and the shortfall comes to $94 billion U.S. dollars. Worse, the largest shortfalls are concentrated in countries that already have large debt burdens, such as Spain, Italy and Portugal (all three have debt-to-GDP ratios over 100%). In Italy, for example, making the target would slash its primary surplus – which excludes interest payments – from 1.7% to 0.7% of GDP. (See also, A Trump Victory Would Fuel Defense Stocks.)
In the final presidential debate in October, Trump said he’d been given “a lot of credit” for NATO members’ newfound willingness to stump up (most are expected to increase military spending relative to GDP in 2016). If the result is a return to the darkest days of the sovereign debt crisis, he may be content to let Draghi take the credit.