THE PIGS OUTLOOK IN 2016

Political turbulence in Portugal, Italy, Greece and Spain is once again threatening Europe's fragile economy. The uncertain political landscape of the PIGS could  weaken the resilience of the wider European economy.

Portugal

Portugal has emerged as the most pressing issue for the European Commission. In Lisbon, a coalition of left-wing parties has rejected additional efforts demanded by the EU executive to cut the deficit below the 3%GDP target this year. Portugal GDP is expected to pick up slightly to 1.6% in 2016 . The main risk for the country is the high level of indebtedness, while policy uncertainty could increase risk premia. Taking into account the measures announced in the draft budget sent to the Commission on 22 January, the deficit is expected to reach 3.4% of GDP in 2016.

Spain

The new government in Madrid would need to find at least €8 billion to bring its deficit to 2.8% of GDP this year, as promised. Under current forecasts, the deficit is expected to reach 3.6% of GDP in 2016. Pedro Sanchez, the leader of the Socialists, has started negotiations with the left-wing Podemos party, to form a new government. Although Sanchez said in recent days that he would comply with the Stability and Growth Pact, Podemos and other potential coalition partners are against further cuts.  The Spanish recovery is expected to remain robust over the next three years. Output is set to expand by 2.8% and 2.5% in 2016 and 2017 respectively. But the uncertainty surrounding the formation of a new government could hinder the recovery.

Italy

Italy is also giving EU officials a headache due to the numerous calls made by Rome for more flexibility in EU fiscal rules. The Italian government is trying to convince the EU executive to give it more time to cut down its massive debt, due to the reforms and investment implemented over the last months and the extra spending made to deal with the refugee crisis. The Italian economy is expected to grow by 1.4% this year. On the fiscal side, the deficit is expected to decline “marginally” to 2.5% of GDP, due to the additional spending included in the draft budget for this year. This means the debt ratio would decrease only slightly in 2016 (132.4% of GDP) also due to the worsening structural balance.

Greece

Although stability has been regained difficult issues remain to be solved during the first review of the country's bailout programme and in particular on pension reform. European partners are asking more efforts from Greece to contain spending on pensions. But the Greek Prime Minister Alexis Tsipras is reluctant to cut those benefits, as they are the only source of income for many families in the country. Greek output is expected to contract by 0.7% in 2016. One of the most striking elements of the new forecast is the improved debt scenario. Now, the Commission expects the debt to peak at 185% of GDP in 2016.