News & Analysis

With the euro attempting a nascent recovery last week in the face of a worsening virus shock, and the ECB seemingly resistant to short term policy easing, hopes of a fiscal response from the eurozone’s largest economy came in to focus last week:

  • After a dismal 2019, the eurozone started 2020 off on the back foot even before the coronavirus outbreak. Last year’s serious growth slowdown was not enough to prompt German policymakers to consider fiscal stimulus, let along relaxing their balanced budget policy. However, recent comments by German Government politicians offer hints the resistance to fiscal support may finally be softening.
  • Finance Minister Olaf Scholz suggested willingness temporarily suspend the debt-brake law that ensures the federal deficit stays limited to 0.35% of GDP in any given year. By suspending the debt-brake, Scholz aims to temporarily shift borrowings from local municipalities to the government, leaving more budget space for municipalities to invest and boost their local economies.
  • Additionally, Economy Minister Peter Altmaier mentioned on Thursday he may introduce tax cuts and individual company support to improve conditions for doing business and mitigate the effects of the coronavirus should the outbreak worsen.

We have seen expansionary fiscal policies from Italy, France, and the Netherlands last year, but the impact of the measures was limited by their relatively small size and by inaction from Germany, the eurozone’s largest economy and by far the member with the most fiscal headroom.

With the ECB already aggressively using unconventional tools such as negative rates and asset purchases, European Central Bank President Christine Lagarde called for additional fiscal support in a speech last week.

ECB argued earlier this month that further monetary policy may not yet be appropriate as the virus shock may have a limited duration for the eurozone economy. However, with an increasing number of new cases reported globally, it is clear that we are entering a new phase of the virus spread and the base case scenario of the virus being contained in this quarter is far less likely than before.

For this reason, the prospect of a fiscal response in 2020 is highly significant for the eurozone economy and the single currency.


Chart: Germany’s budget balance as a % of GDP over the course of the past 10 years


Author: Ima Sammani, Junior FX Market Analyst at Monex Canada.



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