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Euro Area Fiscal Policy: The Factual, the Possible and the Surprising

Author(s): Daniele Antonucci

Date published: Nov 2019

SUERF Policy Note, Issue No 117
by Daniele Antonucci, Morgan Stanley

JEL-codes: E30, E44, E58, E62, H60.
Keywords: Fiscal policy, monetary policy, ECB, inflation, business cycle.

With monetary policy now being more constrained, it’s a fact that fiscal policy is gradually becoming more expansionary. 2020 should see a bigger fiscal impulse, doubling to ~0.4% of GDP. Most euro area countries will likely contribute, led by Germany. This stimulus could possibly get bigger, but mostly in reaction to weak growth. Depending on the macro-political situation, the fiscal impulse could increase to ~1.5% of GDP, with some relaxation in the budget rules. We regard this as an upper bound for now. A proactive, large boost would surprise us. But we can see how economic weakness eventually ‘forces’ additional stimulus. We believe that core Europe is getting more open to this scenario. However, we think that policy-makers will mostly react to economic underperformance. Political and policy shifts in Germany at some point, and perhaps also within the European institutions, are the catalysts we’re watching to gauge whether fiscal policy shifts a gear or two.

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SUERF Policy Note, Issue No 117SUERF Policy Note, Issue No 117

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