After Austerity, Capital Inflows Will Ease Euro Zone’s Pain

The biggest risk of sovereign credit of the euro zone is still a poor economic recovery, but 2014 will ease some pressure. Although fiscal austerity and structural reforms, which resulted in the recession of euro zone’s peripheral countries, will not resume, good news is external capital inflows and Germany’s import demand will increase. This will boost the international market confidence to a certain extent, predicts Chinese credit agency Dagong.

“As the global capital flows switch to other directions, it is also expected that more capital may flow into the euro zone countries. No matter flowing to securities market or to real economy, the capital inflows will help ameliorate the euro zone sovereign debt risks,” Dagong said in its 2014 Global Sovereign Credit Risk Outlook released on Tuesday.

Germany’s new government has already left severe austerity behind and is seeking a new balance between maintaining competitiveness and fiscal consolidation. Plus, it has made labor concessions such as the introduction of the minimum wage standard or restrictions on temporary employment system. This should help boost the European economy as a whole.

Dagong believes that since the European Central Bank has not adopted the policy of quantitative easing, the risk of substantial depreciation of the euro remains relatively low:

“With respect to interest rates, although there is pressure to raise the interest rates in the euro zone, the area’s overall asset bubble has been contained to some degree; hence its impact on the economy will remain relatively limited,” the agency stated.