With Eurozone economic growth in negative territory and inflation subdued, the European Central Bank and the European Commission are putting pressure on countries to match a fiscal stimulus with an expansionary budget.
The European Central Bank launched a second wave of quantitative easing in September and is calling for concerted action on spending. The pressure is mounting particularly on Germany and the Netherlands, which run budget surpluses.
The two countries are being pressed to take advantage of negative interest rates, low debt levels, and their fiscal space to invest more to boost growth at home and the eurozone.
“There are two kinds of countries – those who need to go further with their fiscal efforts and those who need to invest in growth, namely Germany and the Netherlands,” European Commissioner for Economic and Financial Affairs Pierre Moscovici said on Wednesday.
“… Member states with more fiscal space should make use of this fiscal space to have overall an aggregate fiscal stance of the euro area that is appropriate, taking into account the macroeconomic situation,” Italy’s Roberto Gualtieri said.
However, Germany and the Netherlands are resisting calls for a fiscal stimulus while also being critical of the ECB’s quantitative easing stance. The two countries have also objected to the creation of a eurozone budget that would allow for expansionary policy during economic downturns.
The Eurogroup is about to debate the final key elements of a small €20bn “budget” to be spent over seven years. This eurozone pot falls far short of the original vision put forward by French President Emmanuel Macron for a “federal budget” and is unlikely to make a real difference in the current economic downturn.
Still, the fund to which eurozone ministers refer to as “a budget” continues to divide policymakers between North and South. Proponents of the budget see this as a foot in the door that could evolve into something more powerful. Sceptics see it the same way and are keen to see that it remains toothless.
A key issue for ministers is whether the instrument can be financed entirely from the EU’s broader budget, paid in by all the bloc’s 28 governments, or whether it should constitute additional funding, which implies “federal taxation.” France is keen to see additional funding, while the Dutch and others would like to see “the budget” to be funded by the existing EU pot. A compromise could include a so-called “enabling clause,’ opening the way for direct additional funding in the future.