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Germany’s Not the Only Country Lagarde Could Target to Boost Spending

Lagarde Eyes Dozen Euro Members With Precious Room to Spend More

(Bloomberg) --

By Christine Lagarde’s own definition, the European Central Bank president’s desire for a government spending boost in the euro zone can now focus on a dozen countries.

That selection ranges from the region’s biggest economy, Germany, to its smallest member, Malta. The European Commission’s latest forecasts, released on Thursday, show them all having next year what Lagarde described in her confirmation testimony as space for stimulus: a fiscal deficit within 0.5% of gross domestic product.

“Some countries in the euro area can actually use some of their fiscal space in order to improve broadband, infrastructure, and set in place the public spending that will actually help fight the recession. There are more countries in that situation nowadays. When you look at the list of euro area countries, and those that are virtually at zero deficit or within 0.5% of deficit, it’s a majority of countries.”
--Christine Lagarde at European Parliament on Sept. 4

The new ECB president has inherited an institution that under her predecessor, Mario Draghi, has been pressing for national budgets to complement its own monetary easing at a time of slowing economic growth.

Countries in the euro region with surpluses already declining because of fiscal stimulus include Cyprus, the Netherlands, Luxembourg and “to a lesser extent” Germany, according to the Commission.

Germany’s Not the Only Country Lagarde Could Target to Boost Spending

Here’s a closer look at economies that meet Lagarde’s criteria:

Germany

Germany’s Not the Only Country Lagarde Could Target to Boost Spending
  • Forecasts: surpluses of 1.2% in 2019, 0.6% in 2020, 0.2% in 2021
  • 2018 size of economy: 3.3 trillion euros ($3.7 trillion)

Europe’s most populous country is the prime target for ECB officials seeking a fiscal boost. That’s because of Germany’s size and the room it built up from years of budget rectitude. It’s also because industry there faces a combination of headwinds, from global trade tensions to auto sector challenges, that makes it the epicenter of the region’s slowdown.

While stimulus is forthcoming, including climate-change measures assessed by the Commission at 0.1% of GDP, it describes the overall expansion as “modest.” Unluckily for Lagarde, Germany is a country with emphatic opposition to looser purse strings. Voters there cherish balanced budgets and the country’s constitutional brake on debt.

Netherlands

Germany’s Not the Only Country Lagarde Could Target to Boost Spending
  • Forecasts: surpluses of 1.5% in 2019, 0.5% in 2020, 0.4% in 2021
  • 2018 size of economy: 774 billion euros

Lagarde might be more impressed by the Dutch government’s shift in September after years of fiscal policy governed by a mantra for debt reduction. It unveiled a proposal for a national investment fund to benefit from historically low interest rates and spend on long-term growth. Project criteria listed by Finance Minister Wopke Hoekstra include “innovation, knowledge development and infrastructure.” The fund could amount to tens of billions of euros in the next 30 years.

Austria

Germany’s Not the Only Country Lagarde Could Target to Boost Spending
  • Forecasts: surpluses of 0.4% in 2019, 0.2% in 2020, 0.4% in 2021
  • 2018 size of economy: 386 billion euros

Austria might be another key candidate for Lagarde to lobby. The Commission is optimistic the country will defy earlier projections to slip back into a deficit, predicting further surpluses instead. That’s based on the assumption that surging revenues will offset tax cuts and pension increases approved before the Sept. 29 election, and the economic slowdown. Coalition talks are still ongoing, which could change budget plans for 2021 and beyond.

Ireland

Germany’s Not the Only Country Lagarde Could Target to Boost Spending
  • Forecasts: surpluses of 0.2% in 2019, 0.3% in 2020, 0.6% in 2021
  • 2018 size of economy: 324 billion euros

Ireland has grounds to hold off stimulus. The economy is among the fastest-growing in the European Union, but is vulnerable to a no-deal Brexit. The government’s 2020 budget assumed the outcome of a U.K. crash out of the bloc. Even as that risk appears to recede, Finance Minister Paschal Donohoe insists he won’t increase spending.

The Commission cites economic uncertainty, potential global reforms that could affect multinational tax planning, and doubts on sustainability of corporate tax revenue as risks to Ireland’s fiscal position.

Luxembourg

Germany’s Not the Only Country Lagarde Could Target to Boost Spending
  • Forecasts: surpluses of 2.3% in 2019, 1.4% in 2020, 1.4% in 2021
  • 2018 size of economy: 60 billion euros

Luxembourg may be too small for Lagarde to focus on, but she might like what she sees there. Its 2020 budget foresees unprecedented spending, exceeding 20 billion euros for the first time. The country’s surplus is seen declining because of new measures for free public transport and company tax cuts. The Commission notes a major increase in public investment -- because of the purchase of a new military plane.

Cyprus

Germany’s Not the Only Country Lagarde Could Target to Boost Spending
  • Forecasts: surpluses of 3.7% in 2019, 2.6% in 2020, 2.4% in 2021
  • 2018 size of economy: 21 billion euros

Cyprus might also be too small. In any case, the country is trying to cut debt accumulated in its crisis earlier this decade. While the country is set to record the EU’s largest surplus in 2019, that may fall marginally in coming years, partly due to a new national health insurance system. The Commission sees fiscal risks “on the downside.”

The Rest

Greece has consistent surpluses and would like to use that fiscal space for growth-friendly policies. But it but would need to convince creditors -- including the ECB -- as it reduces an enormous debt-to-GDP ratio predicted by the Commission to fall to 163.1% in 2021. Portugal, another victim of the region’s crisis, has a large burden too, seen dropping to 113.7% by then.

Budgets in both Estonia and Lithuania are close to or at balance. Slovenia plans to raise investment but retain a surplus, while Malta’s budget is also seen staying positive as it rakes in revenue from selling citizenship to foreigners.

--With assistance from Paul Tugwell, Sotiris Nikas, John Hermse, Boris Groendahl and Peter Flanagan.

To contact the reporters on this story: Craig Stirling in Frankfurt at cstirling1@bloomberg.net;Zoe Schneeweiss in London at zschneeweiss@bloomberg.net

To contact the editors responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, Brian Swint, Lucy Meakin

©2019 Bloomberg L.P.