Daily Insight
Group Economics Macro & Financial Markets Research
17 November 2016
Is Trumpflation coming to Europe? Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Euro Macro: European Commission recommends positive fiscal stance – Following Mr Trump’s victory in the US presidential elections, expectations for more US economic growth and inflation have built on the back of the likely sizeable fiscal stimulus. Could Europe follow down the same path? Well on Tuesday, the European Commission published its European Semester Autumn package where it sets out the EU’s economic and social priorities for the year ahead. The Commission asserts that that a full delivery of the fiscal requirements contained in the country-specific requirements of the Council would lead to a moderately restrictive fiscal stance for the eurozone in 2017-2018. It criticises the current fiscal framework in that it is focused on country-specific requirements without capturing fully the aggregate implications. Indeed, the Commission notes that change is necessary to overcome the risk of a ‘low growth, low inflation’ trap and it (rightly) argues that given that monetary policy is at the ‘zero interest rate floor’ the macroeconomic impact of fiscal policy is likely to be ‘stronger than in normal times’. Its key recommendation in the words of President Jean-Claude Juncker is ‘a positive fiscal stance to support the recovery and the monetary policy of the European Central Bank, which should not bear the burden alone. Every Member State should play its part: those that can afford it need to invest more, while those which have less fiscal space should pursue reforms and growth-friendly fiscal consolidation’. Commission proposal is limited and may be blocked - However, the details of the recommendation suggest the Commission’s ambition in terms of fiscal stimulus is not very high. The Commission recommends a fiscal expansion of up to 0.5% of GDP in 2017 for the euro area as a whole. This compares to our estimate of the likely Trump fiscal stimulus of 3% GDP in 2017-2018. The limited room for manoeuver in its plan reflects the need to balance macroeconomic stabilisation needs in the short term with the preservation of sustainable public finances in the medium term. In addition, it is doubtful whether countries will follow these recommendations. In particular, countries with space for fiscal manoeuver – such as Germany and the Netherlands – have very conservative views on fiscal policy, and are unlikely to ease policy by much. The Commission seems to concede this point. It notes that there is an asymmetry in the EU fiscal framework. The Growth and Stability Pact is designed to prevent excessive levels of deficits and government debt and there are binding mechanisms to achieve this. However, it notes that it can ‘only recommend, not enforce more expansionary fiscal policies’. Trumpflation is not coming to town – Overall then, it does not seem that the eurozone is about to see a large fiscal stimulus, which will significantly boost growth and inflation. The economic recovery is likely to remain moderate. The eurozone may benefit indirectly from a lower euro, but the effect on demand may be partly offset by rising bond yields. Over the next year, underlying inflationary pressures in the eurozone are likely to remain subdued. Although unemployment has fallen, it remains relatively high and wage growth remains on a downward trend. With the recovery moderate, it will take some time to get unemployment low enough to generate significant wage inflation. The fall in the euro will also impact core inflation with a lag. A clear upward trend in core inflation will probably not start to materialise
Insights.abnamro.nl/en
Bloomberg: ABNM