EU Fiscal Stimulus Is Just a Rule Change Away
Comment of the Day

September 07 2016

Commentary by David Fuller

EU Fiscal Stimulus Is Just a Rule Change Away

Here is the opening of this topical article from Bloomberg:

The European Central Bank is expected to extend its quantitative easing program further during the meeting of its governing council this week. The irony is that while the ECB has various options for continuing a program that isn't working, national governments have relatively few options for embarking on one that most agree is sorely needed. As Mario Draghi and others have said on multiple occasions, the ECB cannot deliver on its own. It needs governments to use fiscal levers to help stimulate spending and growth.

What prevents European governments from doing that right now is ostensibly the Maastricht deficit and debt limits (3 percent and 60 percent of gross domestic product respectively). While the European Commission has said that it would not count some investment spending in those limits, the rules are unclear and make it difficult for countries in breach to invest. What is needed is a change that brings national accounting more in line with reality and the sound principles used in the private sector.

Infrastructure investment in Europe is currently counted as an expense that gets added to (already bloated) national budgets. That fails to account for any multiplier effect the measures might have or the increase in productivity that is unleashed when, say, digital infrastructure is expanded or new transport links are created.

An investment, rather, should be amortized over the period it will be used for, just as it is in the private sector. A company that invests in new machinery, for example, amortizes it over many years. The same could even be true for R&D spending, which can deliver many gains in a knowledge economy. 

David Fuller's view

The EU’s political leadership, mainly self-appointed by Germany and France, has tried to align what were 28 separate nations before Brexit occurred.  They sought to do this with one-shoe-fits-all rules.  These have not worked very well and any attempt to enforce them had been the equivalent of trying to herd 28 cats. 

Europe may have more success with fiscal spending, which many financial observers have long said was overdue, including Mario Draghi, president of the European Central Bank.

If GDP growth is weak and monetary policy near zero percent is harming savers and banks, while benefiting only stock markets, fiscal spending to assist economies looks like a logical and necessary response.  To the extent that it helps GDP growth, it may also cushion the next stock market downturn.       

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