Moody's said its outlook on the sovereign creditworthiness of eurozone countries for 2020 is negative due to elevated government debt levels and limited fiscal buffers amid the threat of a weak global environment on the region's economies.
The rating agency said high levels of public debt and the limited effectiveness of monetary policy restrict the available buffers for euro area economies in case of a severe downturn, leaving the region vulnerable to external economic, geopolitical and even confidence shocks.
"Many euro area sovereigns — specifically Belgium, Cyprus, France, Greece, Italy, Portugal, and Spain — have debt ratios around 100% of GDP or significantly higher in some cases, which is unprecedented for the last few decades and significantly constrains their ability to use fiscal policy to cushion a sharp slowdown in growth," Moody's said. It noted that even major EU economies such as France and Italy have seen debt levels rise to 99% and 135% of GDP, respectively, in 2019.
Despite a significant reduction in budget deficits among eurozone countries in the last few years, large variations in the fiscal strength of their respective governments remain, resulting in uneven progress in terms of deleveraging.
Moody's also warned that a "fragmented" political landscape within EU member states and across the region could lead to a rise in protectionism and geopolitical risks, affecting the ability of governments in the eurozone to implement policies to shore their economies up against a weakening external environment. The rating agency cited the rise of minority and multiparty coalition governments across the EU, as well as increased divisions in the European parliament, that threaten Europe's institutional setup.
"This environment is hindering reform momentum and would likely slow policy responses to domestic or external shocks, with a significant risk of slow and sub-optimal outcomes," Moody's said.
Growth in the euro area is expected to be at 1.2% in 2020, almost unchanged from the 1.1% expansion in 2019, according to Moody's. Subdued global trade growth, U.S.-EU trade tensions, and the risk of a no-trade-deal Brexit are expected to continue weighing on eurozone economic activity in 2020. In particular, weak external demand will continue to affect industrial output in Germany and Italy, while uncertainty about Brexit outcomes put the U.K.'s euro area trading partners like Ireland and the Netherlands at risk.