LIVE MARKETS-Europe's budget headaches

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EUROPE'S BUDGET HEADACHES

Europe's three largest economies - Germany, France and the UK - are all experiencing political constraints on their spending plans, piling on the pressure on incumbent governments.

In Germany, Chancellor Merz is facing his "sternest test yet", according to Berenberg chief economist Holger Schmieding, as the youth wing of his party opposes a pension reform that Merz wants passed on Friday.

Conservative lawmakers voted by a large majority in favour of the contested reform package on Tuesday, in what has been billed as a trial ballot ahead of the full parliamentary vote, although uncertainty persists.

"They will try hard to find a way out," Schmieding says, with Germany's slender coalition government holding a 12-vote majority.

"As a result, the tail-risk outcomes remain highly unlikely for now, in my view. Nonetheless, I cannot rule them out completely."

France's minority government remains on thin ice as it attempts to secure approval of its budget law before year-end.

"Even parties from President Emmanuel Macron’s centrist bloc have signalled reluctance to support the budget, rejecting further tax measures without a clearer deficit reduction strategy," writes Carsten Nickel, deputy director of research at Teneo.

Far-left and far-right legislators will be waiting in the wings, should there be an opportunity to topple the prime minister.

And finally Britain, which is not out of the woods yet either.

Last week's budget contained more tax hikes to fund the state's welfare bill and provide some headroom to meet fiscal targets.

"The hope is that initiatives such as planning reform will still help to mobilise new investments," Nickel says.

"In the meantime, however, a government that started out promising a new focus on growth has consistently chosen higher taxation to fund welfare expansion."

Finance minister Reeves has come under pressure from opposition parties and the media in the wake of the budget but has retained the backing of PM Starmer and the bond market, for now.

(Samuel Indyk)

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