It is a sea-change that is happening almost without fanfare. Across Europe, years of often painful austerity are coming to an end, as governments ranging from the traditionally profligate to the more conservative loosen the purse strings and embrace the need for fiscal stimulus.
The easing of European budgets has been visible in the budgetary plans for some time, but it is only now, with the European economy suffering an unexpected and sharp economic slowdown, that it has become one of the main avenues for avoiding a serious downturn. More by accident than design, economists believe the injection might, this time, be well-timed.
Erik Nielsen, head of research at UniCredit Bank, said it showed that governments were alive to the risks that the continent’s weakening economic outlook could worsen — and that the European Central Bank was no longer the only option when it comes to addressing problems, particularly in the struggling industrial sector.
“It is too early to be optimistic about the economic data,” he said. “That said, in [Europe’s government] ministries the mood and willingness to do something is very different from the austerity years.”
The continent’s fiscal stimulus is far from a huge Donald Trump-style tax cut for business, but it has shown up in the economic assessments of leading international organisations. The European Commission noted last week that a slide into recession was likely to be avoided, partly as a result of the member states’ “expansionary fiscal policy stance”.
The commission’s latest figures on structural changes in eurozone members’ budgets from November do not include many of the more recent injections of money. But even at the end of last year, the three largest eurozone economies — Germany, France and Italy — were all planning a fiscal stimulus worth at least 0.4 per cent of national income in 2019.
This is a significant number, but still only about a quarter of the US fiscal stimulus between 2017-2019, according to IMF figures.
Economic thinking has shifted considerably since the early years of this decade, and is now comfortable with higher debt levels. This is particularly true because the burden of servicing the debt has been falling as economic growth improved.
In a recent report on sovereign borrowing, the OECD said the balance between interest rates payable on government debt and the growth of advanced economies had “improved considerably and slowed growth in debt-to-GDP ratios in recent years”.
Economists are also conscious of the underlying need to upgrade ageing infrastructure in many European countries.
Yet although a stimulus is happening across Europe, it is still far from a coordinated attempt either to fight the economic slowdown or improve the continent’s infrastructure capacity.
In France, President Emmanuel Macron was forced by anti-government protesters into a humiliating reversal of planned fuel tax increases. Along with additional support for poorer pensioners, this pushed up France’s fiscal deficit and bust the EU’s borrowing limit of 3 per cent of national income.
Italy’s standoff with the commission over its planned fiscal loosening has been temporarily defused, but ministers are in no doubt that they need greater flexibility to boost incomes of the poorest and meet election pledges made by its populist leaders.
And Germany has introduced significant tax incentives for investment even though Olaf Scholz, the country’s finance minister, insisted last week that the country would stick to its “black zero” policy of always running a surplus.
Some economists urge the commission to recognise the way the wind is blowing and add further flexibility to the rules eurozone countries must adopt, for example, with rules that specifically allow countries to take advantage of the low cost of borrowing to raise debt for investment projects.
Christian Odendahl, chief economist at the Centre for European Reform think-tank, called for a comprehensive rewrite of the budgetary rules, which he argued amplified the booms and busts of the eurozone economy.
“Europe’s fiscal rules do not allow enough stimulus in a recession, and allow too much spending during a boom,” he said. “An overhaul of the fiscal rules to protect investment spending and prescribe strongly counter-cyclical policies would help to counter the current slowdown.”
With the aggregate deficit in the eurozone projected to be running at 0.6 per cent of gross domestic product in 2019 compared with 5 per cent in the US and the slowdown intensifying, the pressure for further fiscal stimulus is likely to mount.
Although economists are increasingly supportive of such action, they do still express concern over its effectiveness.
Mr Nielsen said efforts to stem a downturn cannot be guaranteed success. “It is always difficult to get the timing right and make it effective, but I do not see the downside risks of say a 1 per cent of national income stimulus to the poorest people,” he said.
Others still worry that although the prospects for government debt are looking more favourable with reasonable growth and low interest rates, these conditions may not last.
George Buckley, chief European economist at Nomura, said “in reality only Germany among the big four economies has sufficient fiscal leeway to step up fiscal support, should it be required”.
Even then, a Germany stimulus is unlikely on its own to be enough to rescue the entire eurozone economy, said Andrew Kenningham at Capital Economics. “Something much bigger would be needed to really lift economic growth in the currency union as a whole,” he said.