Insider Economy Euro zone cautiously eyes fiscal boost

Euro zone cautiously eyes fiscal boost

Euro zone finance ministers will discuss on Monday a document that calls for a more growth-friendly fiscal policy, a move that could lead to Germany’s spending more as fears of a downturn grow amid uncertainty from the coronavirus outbreak.

The 19-country euro zone has for years stuck to a “broadly neutral” fiscal policy in its annual recommendations, despite repeated calls from the European Central Bank and slow-growth states for it to invest more.

But weak growth last year in Germany, the bloc’s largest economy, and fears of a new downturn, fuelled by the coronavirus outbreak in China, are pushing Berlin to soften its stance.

Until now, Germany has preached austerity to reduce fiscal imbalances in high-debt countries, like Italy and Greece.

“If downside risks were to materialise, fiscal responses should be differentiated, aiming for a more supportive stance at the aggregate level,” the European Union document says, confirming a Reuters report earlier in February.

Euro zone finance ministers will discuss the document in Brussels later on Monday, according to the meeting’s agenda, and are expected to adopt it on Tuesday, EU officials said.

China’s coronavirus outbreak is among the main downside risks facing the euro zone economy, according to forecasts released last week by the European Commission.

Eurogroup head Mario Centeno said before the meeting that the outbreak’s effects on the euro zone economy were expected, at present, to be “temporary”, but he said constant monitoring was necessary to gauge its long-term impact.

Italian Finance Minister Roberto Gualtieri told reporters it was too early to gauge the economic impact of the coronavirus.

Regardless of the virus, Gualtieri said “data of the last quarter of 2019 confirm the need that we have at euro area level a supportive fiscal policy, supportive to growth and in particular to investments”.

In the last three months of the year, the German economy stagnated due to weaker private consumption and state spending, data showed last week, renewing fears of a recession .

The EU document stresses that higher spending would need to comply with EU fiscal rules which mandate deficits below 3% of gross domestic product, among other requirements. It is also not clear how the euro zone defines a downturn that would trigger more expansionary policies.

The ultimate decision on turning the recommendation into more spending lies entirely with national governments.

German Finance Minister Olaf Scholz has said in past months Germany would spend more during an economic crisis, but despite last year’s slowdown it has posted large budget surpluses in the first nine months, Eurostat figures released in January show.

(Reuters)

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