Consensus grows that EU must avoid past fiscal mistakes

“Americans are from Mars and Europeans are from Venus” has long been a mantra in strategic affairs. One could be forgiven for thinking that the same is true in fiscal policy.

US president Joe Biden passed his $1.9tn stimulus package less than two months after taking office. In contrast, stimulus does not figure at all on the agenda of this week’s summit of EU leaders. They will instead discuss the international role of the euro.

Erik Nielsen, chief economist at UniCredit, estimates that the eurozone’s fiscal stimulus this year will reach 6 per cent of output — historically big but less than half what he calculates for the US.

Observers familiar with discussions on both sides of the Atlantic say the difference in approach reflects contrasting political narratives. In the US, there is a desire to show that the government is catching up after being perceived not to have taken the coronavirus crisis seriously enough. Europe, on the other hand, managed to break new ground last year, with unprecedented consensus on monetary support and common fiscal spending.

There may be less to the difference than meets the eye, however. The eurogroup of eurozone finance ministers looks more Keynesian than ever before. Last week it committed itself to avoiding a “premature withdrawal of fiscal support” and to a “supportive [fiscal] stance” not just this year, but in 2022 as well. Participants in the discussions note strong agreement over the need to avoid repeating the mistake made during the previous crisis of turning off the fiscal taps too soon.

The European Commission has all but formally proposed to keep the bloc’s fiscal rules suspended for another year. “It is very good news . . . that they won’t slam the brakes on,” said Nielsen.

Money from the groundbreaking EU recovery budget will only start flowing in the autumn. And complaints have been voiced that the bloc is moving too slowly. But in economic policy circles, that delay is increasingly seen as a blessing in disguise if it prompts extra spending when emergency support to workers and businesses is withdrawn and then throughout the recovery.

The real fiscal action will, however, be in national budgets. Nielsen pointed out that we know less about how much governments plan to spend of their own accord than about the amount of European money to come. A supplementary budget in Germany, expected this Wednesday, will be an important indicator. Other countries could increase spending or extend support schemes over the course of the year if needed.

The Biden stimulus, meanwhile, will itself affect Europe’s fiscal politics. One eurozone official points out that it is easier for fiscally conservative northern European governments to be inspired by Biden’s programme, especially if it looks successful, than if the commission had proposed something at the same scale.

But the path to greater fiscal action is not straightforward. Ensuring that budget discipline is not allowed to kill the recovery depends on a politics of multiple omertà, in which discussion of issues where consensus is lacking is quietly set aside. These include the risk of renewed market concern about high-debt countries’ finances, whether national governments will spend EU grants wisely and how to reform the fiscal rules before they are reinstated.

Jeromin Zettelmeyer, deputy director of strategy and policy review at the IMF, said scrapping the current rules was “unrealistic because it is a jump in the dark”. But he hoped it would be possible to give governments the option of more autonomy in how to make debt sustainable in exchange for stronger enforcement if they fail, as he and former IMF chief economist Olivier Blanchard have proposed.

For now, however, there is an agreement to leave such disagreements for another day — and certainly not before the German election in September at which Angela Merkel’s successor as chancellor will be chosen.

Such is the precarious reality of a union of nations that retain the power of the purse. But putting off hard questions to get immediate fiscal policy right could prove an oddly effective, if accidental, manifestation of the EU’s treaty obligation to treat economic policy as a matter of common concern.