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 trims early gains, dangerously close to 1.1200

The positive tone of the pair fades in the American afternoon as demand for the dollar resumes, despite softer-than-expected US data. All eyes on the Fed this week.

EUR/USD News

GBP/USD extends decline, pierces 1.2550

Despite moving in slow-motion, GBP/USD decline is continuous with the pair trading at levels last seen in January, amid political uncertainty weighing on Sterling.

GBP/USD News

USD/JPY remains directionless above mid-108s on Monday

The USD/JPY pair is struggling to make a decisive move in either direction on Monday as the slightly upbeat market sentiment doesn't allow the safe-haven JPY to gather strength.

USD/JPY News

Gold remains on track to close with small losses below $1340

The XAU/USD pair, which closed higher on the weekly chart for the fourth straight time last week, is fluctuating in a relatively tight range on Monday amid a lack of significant fundamental drivers that had a lasting impact on the greenback's market valuation or the risk perception.

Gold News

Gold: Signs of bullish exhaustion ahead of the Fed

Gold's rally seems to have run its course with signs of bullish exhaustion emerging on technical charts ahead of Wednesday's FOMC (Federal Open Market Committee) rate decision.

Read more

Majors

Cryptocurrencies

Signatures