As the European Central Bank (ECB) resumed its bond-buying programme, worth €20bn a month, one question looms large for investors and the markets in general; is the unconventional monetary policy set in stone sufficient to address current economic inefficiencies?
Inevitably, what comes to mind when discussing such programmes is the most recent wave of asset purchases, which failed to achieve its stated objective; to instil economic growth within the Eurozone. This being clearly visible in the recently published economic data.
As data continuous to dramatically deepen within the Eurozone, particularly in countries of high repute, such as Germany – Europe’s largest economy, uncertainty and fear of possibly being on the brink of another economic recession mounts.
Germany’s economic data sluggish amid the ECB’s significant input
Due to the ECB’s self-imposed limits, under which it can own no more than a third of any Eurozone country’s bond market, analysts are already casting doubts on the effectiveness and longevity of the recently employed fresh wave of asset purchases.
Gauging exactly how close are the ECB’s purchases to the self-imposed threshold is somewhat complicated. Yet, despite the intricacy involved, estimates have been deduced.
Frederik Ducrozet, senior European economist at Pictet Wealth Management, presumes that the ECB is closest to the limits in the Netherlands and Germany, owning 31 and 30 per cent respectively, this bolstering doubts on the effectiveness of the recently terminated bond-buying programme.
Evidently, the significant inflows and contribution towards the German economy proved to be unrewarding, with economic data still showing signs of weakness.
Given that the ECB’s stimulus towards the German economy is now capped, and thus is somewhat limited, due to the self-imposed limits, it is then up to Germany and its market players to do something about it.
Undoubtedly, given the said capping, there is a need for an expansionary fiscal stimulus.
Why doesn’t Germany pursue expansionary fiscal policy?
As previously conferred, recently published economic data continued to show weakness, prompting economists to continue pushing forward the idea of employing joint fiscal measures.
Despite this conviction, instilling expansionary fiscal policy is indeed no easy task to undertake, this being mainly due to the complexity involved – due to both public attitudes and fiscal rules.
To clarify thoughts, an expansionary fiscal policy is a form of fiscal policy that involves, amongst others, decreasing taxes and/or increasing government expenditures, in order to fight recessionary pressures. For instance through tax deduction, households tend to enjoy an increase in disposable income, consequently resulting in higher spending. Through higher spending, the Gross Domestic Product (GDP) increases, boosting confidence in the private sector. Meanwhile, an increase in government expenditure increases GDP in a more direct manner, with the latter being a more effective fiscal tool for economic growth.
Despite the benefits of implementing an expansionary fiscal policy, instilling an unbalanced budget, one leaning more towards higher expenditure, is widely portrayed as irresponsible. Albeit this, in the current economic scenario, it might be necessary.
As conferred, implementing an expansionary fiscal policy is no easy task due to the fiscal rules set in stone, under Germany’s constitution, which limits the government’s structural deficit to 0.35 percent of the GDP for any given year.
Despite the limits imposed by the constitution, should economic data further deteriorate, or adverse circumstances occur; such as the US imposing auto tariffs on Europe, an escape clause may indeed be triggered, unlocking significant stimulus which may prove to be fruitful.
In fact, in the event of a severe recession or extraordinary events, a stimulus of 0.5 per cent of the GDP at a given year may indeed be plausible, this enabling economic growth.
Thus, at this juncture, given the data in hand and the challenges ahead, a fiscal stimulus from Germany might be imperative for the economy in general. The mounting of soft data, should continue to pile pressure on politicians to act accordingly.
This article was issued by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. For more information visit, https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.