A missed opportunity

Economic growth in the Eurozone has slumped. Germany has even slipped into recession territory and yields are still extremely low, or even negative. Nevertheless, there is a noticeable absence of fiscal policy stimulus. Some countries aren’t really in a position to, but others are simply unwilling.

Missed opp 1

In 2018 economic growth in the Eurozone came in at 1.8%. This year, the figure is just above 1% and next year it is unlikely to even reach that. In short, the Eurozone economy could really use a boost – mainly from governments. But will that actually happen?

Given the mass ‘disobedience’ of various ECB members – following the central bank’s decision to introduce yet another round of quantitative easing, but without an explicit end date this time – little can be expected in that regard. So the new ECB chief, Christine Lagarde, is looking mainly to governments to take up the baton.

But they don’t seem too keen, either. This is underpinned by the above graph, which shows the expected budget deficit for the Eurozone – for both this year and next. There is a mere 0.1% difference between the two expected deficits (1.0% and 1.1%), which does not immediately point to a major fiscal stimulus.

Not able or willing

There is a mixed picture within the Eurozone. Countries such as Italy – with no economic growth and mountains of debt – but also France – an even bigger deficit machine than Italy – can do relatively little. And while Germany and the Netherlands are set to ramp up fiscal stimulus measures next year, they will tread very carefully in doing so.

The Netherlands will provide the Eurozone with a fiscal boost of – just – 0.06% in 2020. Both countries are expected to report another surplus on their balance sheet next year.


Missed opp 2


And yet, if they had any interest in countercyclical budgetary policy, most Eurozone countries could do more. Mainly because the interest governments pay on their sovereign debt is falling fast. Germany pays just 0.6% of GDP in interest payments. To put it into perspective, this percentage was between 2 and 3% of GDP for decades.

But especially for countries like Italy, the ECB has done its best. Despite Italy’s sovereign government rising by 30% to 135% of GDP in the last ten years, its interest payments haven’t been this low since 1980. If interest rates remain so low, which is certainly a possibility in the short term, the interest payments will fall further when the old debt is rolled over into new debt.

Too little, too late

Yet it seems that, in particular, the countries with more room for fiscal stimulus, like Germany and the Netherlands, want to keep a tight hold on their purse strings in case things go really pear-shaped. The disadvantage of this is that you are often too late. The age-old proverb that ‘prevention is better than cure’ applies to recessions, too. Admittedly, the picture for the coming period isn’t all doom and gloom. But slowing growth and, the ECB policy peak (at least for now) offer governments an excellent opportunity to take countercyclical measures in order to prolong the current economic cycle.

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