July 29, 2019

News in Charts: Euro area macroeconomic policy – what it took and what it will take

by Fathom Consulting.

Fathom’s Macroeconomic Policy Indicator (FMPI) provides a measure of the overall stance of macroeconomic policy across different countries. Since Mario Draghi’s ‘whatever it takes’ speech in 2012, FMPI has shown looser macroeconomic policy in the euro area, primarily reflecting a more accommodative monetary policy stance.

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During that period, the ECB reduced the deposit rate from 0.25% to -0.4%, moving its policy rate into negative territory for the first time. The move was primarily aimed at stimulating demand in the economy. But by removing the hard limit of the zero lower bound, the central bank also had an impact on market perceptions of the extent to which the ECB could support the euro area economy.

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FMPI suggests that in 2019 a small loosening in macroeconomic policy will come from fiscal easing while monetary policy remains on hold. The loosening is driven largely by expected changes in the fiscal stances of France, Germany and Italy which are all expected to become more accommodative in 2019. However, it is not clear whether this marks the beginning of a move towards broader fiscal easing in the region. The loosening in France is largely attributable to costs associated with the one-off elimination of the competitiveness and employment tax credit — a tax measure aimed at reducing the cost of employing workers — whilst the loosening in Germany reflects a rebound from 2018 when spending was delayed during the process of forming a government. Italy has consistently been the most fiscally expansive of the three, with fiscal policy contributing an average of 0.2 percentage points to the output gap between 2014 and 2018. The coalition government would like to be more fiscally expansive, but the European Commission has pushed them to moderate their budgets.

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With little scope for further monetary easing, fiscal policy will need to step in to bolster demand should the next economic downturn occur soon. However, using Fathom’s government debt calculator, we calculate that debt levels in France and Italy will remain around 35 percentage points above their pre-crisis levels over the next five years, despite the sustained fiscal adjustments of recent years. As a result, many euro area governments could face questions about debt sustainability and a renewed pressure on yields during the next crisis.

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The charts in this article have been created using Chartbook on Datastream. The Chartbook was initially created by Fathom Consulting in 2012 and is now a catalogue of approximately 9000 charts, covering over 170 countries, analysing up-to-date macro and financial data. Whether it is a particular topic, country or variable you are interested in charting, the Chartbook has everything you need. The Composite FVI, comprised of readings from all four underlying FVIs, is available for 176 countries in the Fathom Proprietary Indices section of Chartbook. To access Chartbook via Datastream search ‘cbook’.

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