Aline Schuiling, the senior economist at ABN AMRO, says that the call for fiscal stimulus in the Eurozone is becoming louder, but the room for stimulus is limited by EU rules and national political choices.
- “We have calculated the potential room for stimulus from different perspectives. First, there is room within the European Commission’s MTOs (Medium-Term Objectives). If the countries that have either met or passed their obligations from the MTO used the available fiscal room, around EUR 65bn of stimulus would be feasible. The bulk by Germany (EUR 54bn) and the Netherlands (EUR 9bn). Alternatively, the rules of the EC could be ignored, and we can calculate the level of stimulus that would result in stabilisation of the debt ratio at its current level. This would result in a total potential stimulus of around EUR 160bn. Again, the bulk by Germany (EUR 85bn) and the Netherlands (EUR 25bn).
- Finally, the EC already allows countries to deviate temporarily from their MTOs in order to accommodate investment when their economies are contracting or growing well below their potential, albeit under a strict set of conditions. Although it is difficult to translate this guidance into exact numbers, we think that extra government investment of around EUR 140bn would be possible in total.
- Assuming that a fiscal stimulus equal to 1% of GDP, lifts eurozone GDP by around 0.5-0.7%, we calculate that our range of estimates of the room for fiscal stimulus (EUR 65bn – EUR 160bn) would lift eurozone GDP growth by between around 0.25 and 0.75 pps.
- Depending on the shape and size of the stimulus, it could start having an upward impact on growth in the course of 2020. Our current base case scenario is that eurozone growth will remain stuck at modest levels well below the trend rate throughout 2020.
- A fiscal stimulus package in line with maximum potential size according to our calculations (around EUR 160bn) could lift growth to close to the trend rate in the course of 2020. Still, governments are not moving quickly or significantly, so we think any stimulus would be at the low end of the range.”