Forex Flash: Eurozone GDP projections cut to -0.8% – Deutsche Bank

“For the EU, the immediate consequence of the Italian election is, in our view, the risk of the ‘Brussels consensus’ (fiscal austerity coupled with structural reform) losing its appeal. Pushing ‘new fiscal realism’ beyond automatic stabilizers will be a temptation, however the question is whether markets accept the higher level of debt.” writes Giles Moec at Deutsche Bank. It is not in German or ECB interests to rock-the-boat, but markets are not necessarily pricing this new configuration yet.

Moreover, “We have made an interim revision to our euro area GDP view – we marked into our forecast the downside surprise in Q4, the weaker signal from PMIs in Q1 and a provisional reaction to the increased political uncertainty in Italy. We have also cut euro area 2013 GDP growth from -0.3% to -0.8%.”

The ECB meets again on 7 March. “We expect the Council to feel that the accommodative monetary policy stance is still broadly right. The risk is tilted more in the direction of easing of policy, not a rate cut but rather a non-standard, ‘credit-easing’-type policy within the next few months.” Moec adds.