OREANDA-NEWS. December 17, 2015. Fitch Ratings expects migration and security policy to dominate western Europe's political agenda in 2016, inevitably leaving less room for ongoing efforts to improve budget coordination and drive European and national structural reforms. These new challenges are also likely to push voters further away from mainstream parties, further weakening governments' willingness to continue with politically costly, but economically beneficial, reforms.

Europe will continue its trend of easing up on fiscal measures in 2016. Overall, we expect fiscal policy to be mildly expansionary. While this policy is growth-friendly and not significant enough to threaten ratings at this point, the new fiscal stance will run up against Europe's fiscal rules and potentially undermine fiscal credibility. In the eurozone we forecast a subdued 1.7% GDP growth in 2016 following 1.5% in 2015. Due to structural rigidities and weak underlying growth potential, we do not expect eurozone growth to accelerate substantially despite the stimulus from low oil prices, a weaker effective exchange rate and easing financing conditions better transmitted to the real economy.

The recent Portuguese general election has produced a minority government and the upcoming Spanish poll is likely to do the same. Given the still-weak fiscal positions of both countries, the risk of fiscal slippage in 2016 has increased, in Fitch's view. In Spain, tensions with Catalonia are likely to persist in 2016.

Loose monetary conditions will support the private and public sectors in 2016. Financing conditions for sovereigns in western Europe will continue to be benign and the effective interest cost on public debt to fall further, most markedly for peripheral eurozone sovereigns. This will offset only some of the fiscal loosening planned for 2016.

The UK's renegotiation of the terms of membership prior to its referendum, which we expect to be called in 2H16, will be an additional source of political uncertainty in the region. Our baseline is that the UK will vote to remain in the EU, but the risk of "Brexit" - which would be a moderately credit negative event for the UK - is significant.

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

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