Nicosia, Cyprus. Cyprus is among European Union countries with the greatest fiscal space to respond to a potential new energy crisis linked to the war in Iran, according to a report by Fitch Ratings.
Fitch assessment of fiscal flexibility across western Europe
In its report titled “European sovereigns’ capacity to absorb another energy shock varies,” Fitch said the fiscal ability of western European countries to respond to a new energy crisis triggered by the conflict in Iran differs significantly across the region.
Fitch said Belgium, France and the United Kingdom currently have the least fiscal flexibility to introduce additional support measures.
“Many western European sovereigns were already in a vulnerable fiscal position with the war in Iran adding to those pressures through higher energy costs, rising inflation, weaker growth and tighter financing conditions,” the agency said.
Countries cited as having the most fiscal space
“Within the EU, those that have maintained a strong record of fiscal prudence in recent crises – Cyprus, Greece, Ireland, the Netherlands, Portugal, and most Scandinavian sovereigns – have, in theory, the most fiscal space to respond, although with some moderation to prevent a sharp deterioration in debt and deficits,” Fitch added.
The report said these countries are better positioned to introduce support measures without causing a severe worsening in public debt levels or budget deficits.
Deficits near 3% and support measures in Spain and Germany
Fitch said countries that have recorded deficits close to 3 per cent in recent years, including Germany and Spain, still retain room to increase spending to support households and businesses without materially affecting the trajectory of their debt ratios.
The agency highlighted Spain as being at the forefront of such efforts, noting that Madrid has announced support measures amounting to 0.3 per cent of GDP.
Regarding Germany, Fitch said additional spending on defence and investment is expected to continue, while further fiscal measures aimed at offsetting the effects of the Iran conflict would place additional pressure on the deficit.
However, Fitch said these pressures are likely to be balanced by savings elsewhere, as such expenditures would probably fall within EU fiscal rules and Germany’s domestic debt brake framework.
How do you think Cyprus should prioritise any support measures if energy costs rise again?