War on its doorstep, the far-right in power, rows over debt rules and the ECB stuck in an inflation bind: 2022 could be anything but smooth sailing for the eurozone. 

Prices are already soaring and lockdowns have spread through the Continent. But even if the virus is finally defeated, there is a smorgasbord of fresh potential threats ahead that are likely to fuel another tumultuous year for the bloc’s economy if ignited. Markets have a lot to navigate.

Tensions between policymakers will emerge in Brussels over post-Covid spending, Emmanuel Macron faces the voters in France, political turmoil risks returning to Rome and Vladimir Putin could weaponise Europe’s gas supply as Russian troops amass on the Ukrainian border. 

The next year was supposed to be another one characterised by recovery, but for Europe it could be a rocky 12 months. 

Debt rules battle

Gruelling talks over how to reshape Europe’s debt rules for a post-pandemic world will leave a lasting mark on the region’s economy. Tensions between north and south over new spending restraints are set to explode.

The EU’s Stability and Growth Pact (SGP) requires countries to limit their debt pile to 60pc of GDP and the deficit to 3pc, rules that have been suspended until 2023 due to the pandemic. 

However, the bloc’s southern countries think a return to the old rulebook is unimaginable in a post-pandemic Europe. Debt is running at over 150pc of GDP in Italy and above 110pc in Spain and France.

Public debt mountains make achieving the current targets impossible and the south wants more flexibility on spending to spur growth through investment. But they will face fierce resistance from the north.

Paolo Gentiloni, the EU’s Commissioner for the economy, has called for debt limits to be set on a country-by-country basis given the huge variation between the likes of Germany and Italy.  

The former Italian prime minister has warned the EU rules “cannot lump all countries together” as the “differences in the debt ratios are too high for that”. 

However, ultra-prudent northern nations are lining up against a radical shake-up of the rules that would allow indebted countries to borrow more. The anti-borrowing ‘Frugal Four’ of Austria, the Netherlands, Denmark and Sweden have already warned that “reducing excessive debt ratios has to remain a common goal” in new rules.