REFILE-LIVE MARKETS-Why the German fiscal shift could hurt the periphery

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WHY THE GERMAN FISCAL SHIFT COULD HURT THE PERIPHERY

The recent shift in German fiscal policy could enhance economic growth and confidence in the largest euro area economy, but the impact on the rest of Europe is less obvious.

"The risks of the peripheral countries 'spinning out' rise whenever Germany does well," says Stephen Jen, CEO at Eurizon SLJ Capital.

"This is what we refer to as the 'centrifugal' force of Europe, which increases when the speed of the spin rises."

German long-dated bonds saw their worst sell-off in years, the euro jumped to its highest level in almost four months and stocks rebounded in early March after German parties agreed to loosen fiscal rules.

"In the U.S., equity investors pay more attention to sector allocation; in Europe, the priority should be geographical asset allocation," Jen said.

"We warned investors not to blur Germany's outlook with that of the rest of Europe," he adds.

"Only a handful of the EU member countries have the fiscal space to meaningfully increase their fiscal spending."

(Stefano Rebaudo)

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