“The situation in the euro area has clearly improved, with the aggregate deficit projected to fall under 2 percent this year,” according to Yvan Mamalet, senior euro-area economist at Societe Generale SA in London. “But the problem is that it’s not a fiscal union, and that’s why there’s only limited room for maneuver. The space on paper looks relatively large, but that gives you a false sense of security.”
Euro Conundrum
And while the euro zone’s creaky debt-and-deficit pact attempts to punish budgets that stray too far into the red, there’s no mechanism to oblige member states to spend more when the economy needs a lift.
If there’s one country where the political tide has definitively turned against austerity, it’s the U.K., following the vote there on June 23 to leave the European Union. Policy makers on both sides of the fiscal-monetary divide are likely to throw whatever stimulus measures they can find at the economy to prevent a painful contraction. Chancellor of the Exchequer Philip Hammond -- who replaced Osborne when he was fired by new Prime Minister Theresa May -- said this month he’s ready to “reset” fiscal policy to respond to Brexit if need be.
Yet even in the U.K., the central bank may be in the vanguard with measures to stoke demand. Economists are confident the Bank of England will cut its main interest rate on Thursday, according to a Bloomberg survey. Restarting asset purchases could also be an option.
Globally, monetary policy is still carrying more than its share of the burden for growth, and a few tweaks to fiscal policy here and there aren’t going to make the difference, according to Andrew Bosomworth, head of portfolio management in Germany for Pacific Investment Management Co.
“From an investment perspective I don’t overly rejoice when I see a few more percentage points in fiscal stimulus,” Bosomworth said. “Stimulus has got to be done in a way that’s concurrent with structural policies that boost growth potential. It doesn’t help to go out and build a bridge to nowhere.”