Euro Area Mulls Trump Tactic by Looking to Curb Austerity Stance

  • European Commission recommends fiscal expansion of 0.5% of GDP
  • EU finance ministers will debate new fiscal stance this week

It’s not just U.S. President-elect Donald Trump who wants to use government spending to boost the economy’s recovery; the European Union is weighing a fiscal expansion of its own.

When EU finance ministers meet in Brussels on Monday and Tuesday they’ll debate whether the time has come to loosen their belt straps and get behind a European Commission call for a fiscal increase in the euro area of 0.5 percent of gross domestic product in 2017, outstripping the 0.1 percent allotted in member states’ budgets.

Last month, European Central Bank President Mario Draghi told lawmakers that governments needed to address euro-area weakness while the Organization for Economic Cooperation and Development recommended that Europe ease budget rules to foster investment as monetary policy has been stretched thin following years of unprecedented stimulus. An uneven recovery has helped incite populists from Paris to Rome, harnessing voter anger after years of EU-ordered austerity left millions out of work and growth lagging behind the U.S.

“The European Commission has the political mood in mind when it adopts these kinds of policies,” said Vincenzo Scarpetta, senior policy analyst at the London-based Open Europe think tank. “They have made it quite clear they take into account the risk of a further political backlash against euro-zone economic policy.”

Since Greece’s debt triggered a wave of shocks that spooked investors in Europe more than six years ago, EU governments -- led by Angela Merkel’s Germany, the bloc’s largest economy -- have been pursuing an austerity-first agenda; not only raising taxes, slashing spending and striving to narrow deficits themselves but demanding other nations do likewise. But with growth still sluggish and euro-area unemployment at just under 10 percent, that’s gone down badly at the ballot box.

The EU, however, doesn’t have the right to control individual countries’ fiscal regimes. While the commission, the bloc’s spending police, has the power to fine countries that repeatedly flout deficit and debt-reduction targets -- though it has never done so -- it has little bite when it comes to persuading governments to be less austere.

That means a European stimulus could fall short of plans floated by Trump’s team, which would establish an “infrastructure bank” to fund the repair of bridges and roads. The president elect’s economic advisers released a plan in October advocating the provision of as much as $140 billion in tax credits to support $1 trillion in infrastructure investment.

The Brussels-based commission said last month that the time had come for a positive fiscal stance in the 19-nation currency area, suggesting that countries with “sufficient fiscal space” should spend more over the medium term and invest, in particular in areas of digitization, energy transition and transport. The commission recommended that the euro area aim for fiscal stimulus of 0.5 percent of GDP in 2017 -- about 50 billion euros ($53 billion) -- with Germany, which accounts for 29 percent of the euro area’s output, having to make the greatest effort.

Read about Draghi’s statements to parliament on fiscal stimulus

European Union Economic and Monetary Commissioner Pierre Moscovici went so far as to say that in recommending the expansionary policy, “the commission is acting as a eurozone finance minister would, and perhaps one day, will.” And while some in Europe have been calling for a more expansive fiscal stance to complement the ECB’s policy of quantitative easing, Germany, which has a budget surplus of 18.5 billion euros, leads a group of hardline nations standing firm.

“It’s up to the countries that have a surplus to decide for themselves whether they will spend now or in the future, or to put it into reducing their debt,” Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of his euro-area counterparts, said last week in remarks to reporters at The Hague. “The commission can advise us; the commission can call itself the Ministry of Finance, but that doesn’t mean it’s true.”

According to a draft document prepared by EU finance ministry officials for this week’s meeting and obtained by Bloomberg News, “fiscal policy at the euro-area level is necessary to complement monetary policy in supporting demand, notably investment, and moving out of low inflation while taking due account of ongoing debt sustainability concerns.”

However, an earlier reference to the 0.5 percent of GDP fiscal stimulus being “a prudent and pragmatic target” was removed from the final draft, signaling the divisiveness of the recommendation.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE