February 19, 2021 | 17:01
To All the Fiscal Stimulus: Always and Forever?
A year has passed by since officials were forced to lock down northern Italy as the coronavirus made its first appearance in Europe. In the months that followed, Europe’s economies plunged at an historic pace, only to rebound at an equally historic rate. Although the region is past that worst phase and is attempting an economic recovery, the second wave of infections and some new variants are blocking a stronger comeback.
Regardless, looks like it is time to focus on what happens next. And that’s a good thing, right? When everyday life begins to normalize, the world should be celebrating… using the necessary precautions, of course. But that means all those government support systems that have prevented business failures; kept food on the table and the lights on; well, they’re going away. They weren’t meant to be in place forever. Much like the ECB’s emergency bond purchase programs... only to be used until the health crisis is judged to be over. Europe’s FMs are already discussing such steps and will try to find that delicate speed to start moving away.
Our Stephen Gallo, European Head of FX Strategy, correctly points to the German debt brake as the one to watch. At the height of the pandemic, Germany was backed into the corner and was forced to put aside its pride and pull the decade-old debt brake in order to save the economy. Also known as schwarze Null, that rule is (or was) in the constitution, and limited how much the government could spend. Well, Germany has spent more than that. So, when Germany starts making noises about bringing it back (2022?), the rest of Europe will be forced to make some modifications as well to its stimulus. But the debate there will be heated, with Chancellor Merkel calling for a slow return, while Markus Soder, head of the CSU and potentially the next Chancellor, warning of high debt and high taxes. “Germany stands for financial seriousness and we should stay that way.” France will also be walking on a tightrope, with the first round of the next presidential elections starting in April 2022.
Bottom Line: The removal of stimulus will likely be a 2022 story, but the time to start planning is now.