Rising bond yields, tighter fiscal conditions and fierce competition to raise capital from technology giants are creating a challenging environment for European markets, the Minister of National Economy and Finance and Eurogroup president, Kyriakos Pierrakakis, said.
Speaking in a discussion with author Giuliano da Empoli at an event organised by ELIAMEP, he said the average 10-year yield in Europe had climbed to 4%, from 1.1% a decade ago.
He explained that the shift reflected the new conditions created by the artificial intelligence revolution, as well as governments’ growing fiscal needs. “Europe’s bond markets are being tested in a more challenging environment,” he said, noting that the average fiscal deficit in Europe had doubled compared with 10 years ago.
At the same time, governments are being called on to fund more investment priorities, from defence to higher social spending as the population ages, while higher energy costs are adding to the pressure.
Competition with Big Tech
The Eurogroup president placed particular emphasis on the competition between governments and technology giants for capital. Microsoft, Amazon and Google are now competing with governments in the markets to raise funding, he said, putting upward pressure on bond yields.
Until recently, these companies had funded their expansion and investment mainly from their very large cash reserves, he said. Their growing need for capital has now become another factor affecting markets.
Mr Pierrakakis clarified, however, that the widening of yield spreads between government bonds was not linked solely to countries’ fiscal positions, but also to broader changes in the global economy.
European resilience
The minister argued that, despite the challenges facing it today, Europe is more resilient than it was during the Greek crisis of 2010. At the time, he noted, the institutional framework needed to address a crisis such as the one Greece experienced was not in place. Since then, European institutions have been strengthened, banks have built up stronger capital bases and the European Stability Mechanism (ESM) has been established. There is now also a fiscal framework at European level.
On fiscal surpluses, he noted that only five of the EU’s 27 member states currently have a surplus: Denmark and four countries that were subject to IMF programmes in the previous decade. “This is a collective trauma that has been turned into policy,” he said.
Mr Pierrakakis also discussed the impact of artificial intelligence on the economy and the labour market, noting that technological progress could shift income from labour to capital.
Labour and competitiveness
For this reason, he said, social security systems will need to adapt, and education must be redesigned to meet the needs of a world that has yet to take shape fully.
At European level, he stressed the need for more targeted strategic choices and better use of available resources so that Europe can strengthen its position relative to the US and China. “If you invest in everything, you achieve nothing. We must pick winners,” he said, arguing that Europe’s diagnosis of its problems, as set out in the reports by Mario Draghi and Enrico Letta, must be translated into joint action.
For his part, Giuliano da Empoli said he believed Europe had shown greater resilience than might have been expected given the succession of crises. He described Greece’s political leadership and government as one of Europe’s more promising examples in terms of the political direction they represent.