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By Luke Heighton
     LONDON (MNI) - Europe should maintain a neutral fiscal stance for 2020, a
European Commission advisory body has recommended, though seven countries have
space to increase investment and enhance their growth potential.
     Germany, Greece, Cyprus, Luxembourg, Malta, the Netherlands and Austria
should all take advantage of very low interest rates to help mitigate the
effects of the current low growth environment, with some positive spillover
effects for neighbouring economies possible, the European Fiscal Board (EFB)
     Here are the key points from the EFB's annual report released today:
     --The EFB provided its advice for 2020 on the basis that the euro area
economy has weakened since 2018. However, "the central scenario for 2020 is that
the economy will strengthen again," and therefore "the euro area as a whole does
not need any discretionary support from fiscal policy in 2020."
     --"The ongoing slowdown has been concentrated in the manufacturing sector,
which is capital intensive, and therefore has had a limited impact on the labour
market: net job creation is projected to continue both this year and in 2020,
albeit at a slower pace, thanks to a continuing expansion in the services
     --Although all EU member states are expected to benefit from the economic
expansion in 2020," the EFB said, and "the growth outlook across the euro area
is less uneven than in the past [...] important differences persist." At 0.7%,
economic growth in Italy is expected to be less than half the euro area average
in 2020, while Ireland, Malta and Slovakia are expected to grow more than twice
as fast as the rest of the euro area.
     --Global economic activity should rebound in 2020, "as emerging economies
are expected to benefit from improved financing conditions thanks to a more
accommodative monetary policy in the United States going forward. Fiscal
stimulus in a number of major economies, most notably China, will also support
the global economy," the EFB said. The outlook remains subject to "significant"
downside risks. "A flare-up of further trade tensions between the United States
and China, and between the U.S. and the EU, would adversely affect external
demand and investment. The outlook for external demand is further subject to the
risk of a weaker-than-expected recovery of emerging economies, particularly
     --The EFB took account of the ECB's announcement of a new series of
targeted longer- term refinancing operations, starting in September 2019 and
ending in March 2021, and the Governing Council's announcement in June that key
interest rates will remain on hold through the first half of 2020. Nevertheless,
the lack of a central fiscal capacity means that in the event of a severe
downturn "the current framework is not equipped to significantly mitigate the
impact of such events."
     --Brexit remains a source of "substantial uncertainty," while "a prolonged
phase of high sovereign yields in high-debt countries could generate further
stress for the banking sector, and lead to a tightening of credit conditions. On
the upside, however, business confidence may be more resilient to trade tensions
than is currently assumed, and domestic headwinds may dissipate faster than
expected. Internal demand could therefore prove stronger than anticipated."
     --"Taking into account only the fiscal measures that Member States have
already adopted or sufficiently documented, the structural primary balance is
expected to deteriorate by 1/3 of a percent of GDP on aggregate. Consistent with
this, net expenditure - i.e. primary government expenditure net of certain items
outside the control of government and net of revenue measures - is expected to
grow faster than potential GDP, leading to a weakening of fiscal situations. In
an economy expected to operate at or above capacity, such a stance could turn
out mildly pro-cyclical," the EFB concluded.
--MNI London Bureau; +44 203 865 3829; email:
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