(Bloomberg Opinion) -- The European Central Bank’s decision last week to reactivate quantitative easing has put monetary policy back in the spotlight. But as the bank’s president Mario Draghi says, the currency union would be in much better shape if countries with strong fiscal positions opened their purses.
Fiscal doves will no doubt take heart from a slight softening of tone in Germany, the promise of some tax cuts and more investment in the Netherlands and the start of a debate in the European Union on how to improve its fiscal rules. But these changes are still too small to matter. If past experience is any guide, it may take a full-blown recession before the continent’s political leaders act.
Announcing the fresh round of QE last week, Draghi was unequivocal about what needed to happen next. “It’s high time for fiscal policy to take charge,” he said, adding that “if fiscal policy had been in place, or would be put in place, the side effects of our monetary policy would be much less.” The ECB’s governing council agreed. The introductory statement to last week’s report, which summarizes the consensus views around the table, said “governments with fiscal space should act in an effective and timely manner.”
A superficial assessment might suggest that something is shifting among the richer members of the currency union. Last month Olaf Scholz, Germany’s finance minister, hinted that Berlin could spend up to 50 billion euros ($55 billion) in a crisis, putting a number on a possible stimulus for the first time. The Dutch government unveiled an expansionary budget on Tuesday, including 350 million euros for affordable housing and a plan to set up a long-term investment fund. Last weekend in Helsinki, the EU’s finance ministers looked at how to revamp the rules governing tax-and-spending decisions.
The euro zone economy is slowing because of the global trade wars and its knock-on effect on business confidence, so any fiscal moves are welcome. But a closer look at the detail suggests the announced changes will have a very limited effect. Scholz reminded everybody this month that Germany has no intention of abandoning its “black zero” policy, a balanced budget rule introduced in the aftermath of the region’s sovereign debt crisis. Any stimulus from Berlin would come after a recession — and not to prevent one.
The Dutch government, meanwhile, is still eyeing a small fiscal surplus for next year and any Netherlands investment fund would take shape over three decades. That’s not great cause for excitement. As for the EU, the Helsinki meeting proved that there were still major differences about how to change the fiscal rules, meaning they won’t be rewritten any time soon.
So the euro zone will have to rely on monetary policy for the foreseeable future. This is disturbing for two reasons. First, a well-designed, coordinated fiscal stimulus would almost certainly prove more effective than monetary policy, which is already stretched. Second, the ECB is increasingly split, with the central bank governors of large countries such as France, Germany and the Netherlands opposing Draghi’s plan to reactivate net asset purchases. Christine Lagarde, who takes over as president in November, may find it politically difficult to keep pressing on the monetary accelerator.
The danger is that governments will only act decisively when it’s too late. Draghi’s last appeal looks set to go unheeded.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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