Eurozone has ‘fiscal space’ of up to 1.7% GDP – ABN AMRO

Nick Kounis, head of financial markets research at ABN AMRO, suggests that for the Eurozone economy, the potential need for fiscal stimulus has caught the imagination with economic growth having slowed to below trend rates, risks to the outlook to the downside and limitations on monetary policy.

Key Quotes

“France’s Finance Minister Bruno Le Maire has called for Eurozone member states such as Germany to be prepared to use their ‘fiscal space’ in case the Eurozone downturn worsens. Meanwhile, according the account of the ECB’s March meeting, officials called for ‘jurisdictions that had fiscal space (to) stand ready to use it, given the downside risks to growth’, apparently recognising the constraints on monetary policy. So how much fiscal space does the Eurozone have in case the Eurozone slowdown intensifies?”

“The Eurozone as a whole is running a primary budget surplus of 1% GDP, its nominal GDP growth is estimated to be around 2% this year (on the basis of our below consensus forecasts) and the interest payment ratio is 1.8% GDP. On this basis, the rule of thumb suggests that an additional 1.2% GDP stimulus would be possible (we estimate that a 0.4% GDP stimulus is already in place), while still leaving the debt ratio steady.”

“However, it is important to note that changes in fiscal policy according to this rule of thumb implies large differences in changes in the fiscal stance between countries.”

“For instance, Italy and France would need to tighten policy to stabilise their debt ratios, while Germany, the Netherlands, Austria and Ireland would be putting in place an enormous fiscal stimulus. The weighted average of these moves then leads to a eurozone aggregate of 1.2% GDP. If we assume that the countries that have fiscal space go ahead with fiscal stimulus in line with the rule of thumb above, while France and Italy keep policy unchanged, then the weighted aggregate stimulus for the eurozone would then cumulate to around 1.7% GDP.”

“Of course this is on paper. In reality, given that this stimulus relies heavily on aggressive fiscal easing by Germany and the Netherlands – two countries that might be politically reluctant to take such action – the real fiscal stimulus would probably be much less.”

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

Feed news

Latest Forex News

Editors’ Picks

EUR/USD steady around 1.1240 in ultra-thin holiday's trading

The EUR/USD pair bounced some 20 pips from its weekly low during the Asian session, now mute around 1.1240 with most market's off today. Softer-than-expected US housing data passed unnoticed.

EUR/USD News

GBP/USD battling around 1.3000

The GBP/USD pair is heading nowhere fast after bottoming for the week at 1.2978, amid lack of progress in Brexit negotiations.  Encouraging UK data failed to trigger Pound's demand.

GBP/USD News

USD/JPY: On track to close in the middle of its 50-pip weekly range below 112

The USD/JPY pair remains frozen below the 112 handle in the NA session and there is no reason for it to make a meaningful move as investors are already enjoying the Easter holiday.

USD/JPY News

The Tale of the Prosperous Consumer-US Retail Sales

American consumers asserted the right to spend in a grand fashion in March boosting retail sales to the fastest expansion in 18 months as the booming job market put the shutdown marked holiday season to rest.

Read more

Gold Forecast: Eyes 8-month rising trendline after weakest weekly close since December

The troy ounce of the precious metal lost around $17 this week and now looks to record its lowest weekly close since the end of December near $1275.

Gold News

majors

Cryptocurrencies

Signatures


  •  
  •  
  •  
  •  
  •