MNI POLICY: EU Fiscal Board Recommends Neutral Fiscal Stance

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)

said.

     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

sector."

     --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

China."

     --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: jason.webb@marketnews.com

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