Most European governments have little choice but to reduce their budget deficits, despite weak private demand (Chart 1). Ultimately, Europe’s problems cannot be solved by fiscal austerity alone. Any durable solution must include a series of measures to rebuild competitiveness.
And measures that increase demand, with no corresponding increase in supply, could make housing affordability worse. Speaking of the uptrend in interest rates, a related risk to Canada’s financial stability that we have been watching closely is that of a snapback in global interest rates.