It appears that the consensus over a fiscally tight, export-driven EU economy is contested. The Finnish Council Presidency will table a proposal for the review of the fiscal compact on Saturday’s Eurogroup, Reuters reports.
According to a leaked document, the European Central Bank’s quantitative easing program has averted the unravelling of the eurozone but has in-itself failed to bolster growth. The document is in line with European Fiscal Board recommendations, making the case for a review of the rules that require states to keep deficits below 3% of GDP and aim towards a 60% debt-to-GDP ratio.
Calls to revise the Fiscal Compact will not necessarily consolidate a North-South political divide, which already exists.
As Germany is on the brink of recession, attitudes towards fiscal discipline are changing. The biggest economy in the EU contracted by 0.1% in the second quarter and data suggests the country will post negative growth in the third, officially entering a technical recession for the first time since 2013. In Germany, one in five jobs is dependent on exports, which are now suffering due to the Sino-American trade war, while the threats of US tariffs and a disorderly Brexit also weigh on business confidence.
Given negative bond yields for bonds issues of up to 30-year maturity, Germany is considering a policy turn towards public investment to counterbalance a nosedive in exports. The country maintained the biggest trade surplus in the world for more than five years and now has the fiscal space for a significant turn to domestic consumption.
Germany is ready to pump “many, many billions of euros” into its economy to counter any significant slowdown in growth and fight climate change, Finance Minister Olaf Scholz told parliament on Tuesday.
“We will not get away with small measures,” Scholz added, underscoring the need for investment in a transition to a low-carbon economy.
The banner of sustainability is also seen as a legitimating narrative that can justify the political U-turn of fiscal conservatives, not least the German Christian Democrats. Chancellor Angela Markel and SPD Environment Minister Svenja Schulze are expected to announce a bold climate package investment package on September 20. This will include a wider pricing mechanism for carbon emissions and payouts for low-income families to cushion the impact of the new measures. The package will be complete with a €5bn investment fund, extending interest-free loans for environmental protection projects.
The appointment of Italy’s prime minister Paolo Gentiloni as Commissioner for Economic and Financial Affairs is seen as a signal towards policy change.
In his acceptance speech, Gentiloni was clear about his intentions: “I thank President Ursula Von der Leyen for the position she has assigned me in the new Commission,” Gentiloni said, adding that he will work “above al to contribute to boosting growth and social and environmental sustainability of that growth. ”
Meanwhile, the second Giuseppe Conte government in Italy is planning an expansionary budget, which at least in part will be deficit-financed. The budget deficit planned will be approximately 2,3% of GDP, compared to a projected 2,04% deficit this year.
Above all, the Conte government wants to avoid a scheduled VAT hike from 22% to 25,2%. On Tuesday, Conte was explicit in his call for fiscal compact reform. “We want to review the Stability and Growth Pact so that EU rules help growth and sustainable development,” Conte said in an address to the Senate.
There is not as yet a policy consensus. Austrian chancellor Sebastian Kurz Twitted on Monday that EU deficit rules should be toughened rather than loosened.