Euro area: How much fiscal boost can we expect?

Over the course of 2019 the euro area economic situation has deteriorated quite significantly. Quarterly growth has come down below potential and is unlikely to recover soon.The slowdown has been initiated by a global manufacturing weakening.

Highlights:

  • EMU fiscal policy is in the focus due to weak activity and with the ECB reaching its limits. 2020 budget plans point to a fiscal impulse of 0.3 pp of GDP with Germany (2/3), the Netherlands (~20%), and Italy (~10%) the major contributors.
  • In case of an adverse scenario, under the Fiscal Compact there is a potential for a further fiscal impulse of 0.8% of GDP in 2020 and the frameworks offers additional flexibility, e.g. in case of a sharp slowdown.
  • For an effective policy impulse, core countries, especially Germany, have to take the lead. A strong and sustained increase in German public investment would have beneficial spillover to the rest of the euro area, especially if the ECB policy rate is kept low, as we expect. However, the German government is likely to wait if the situation deteriorates further.
  • The potential fiscal backstop will be reassuring to financial markets thereby supporting risky assets while working against a new fall in government bond yields.

Read the full publication below.

EURO AREA: HOW MUCH FISCAL BOOST CAN WE EXPECT?

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