Will it be back to the "same old, same old" once this is all over?

 

ref:- "Europe should not return to pre-pandemic fiscal rules", by Joseph Stiglitz, Opinion in the Financial Times

Right... before we get into the fascinating field of the Eurozone's fiscal rules, and we're not entirely joking given how often they've been ignored over the years, we need very briefly to get yesterday's Fed announcement out of the way. Every financial outlet is stuffed full of reports and analysis on the subject, but if we had to summarise things it would go something like this:

As expected, Chairman Powell opened the door to a November announcement regarding the start of a tapering of the Fed's emergency asset-purchasing programme, possibly with immediate effect. That would require employment growth to continue at a decent lick, but assuming that's the case the programme is expected to be wound down in its entirety by mid-2022.

The Fed's "dot-plot" of FOMC members' interest rate forecasts, currently everybody's favourite tool to watch, revealed that a majority (by 11 to 7) now expect one rate hike next year, with three more both in 2023 and 2024. Being a mite more hawkish than expected, quite frankly it overshadowed the tapering talk and suggests that Mr Powell has yet to convince a fair number of his colleagues that above-target inflation will indeed prove to be as transitory as he suggests. In all truth, this was hardly a bombshell and needs to kept in perspective, but markets reacted the way you'd expect them to at the slightly greater prospect of interest rate rises as a counter-inflation measure: a stronger dollar, and a flattening of the yield curve... short end higher, longer bond yields lower.

So, back to the Nobel laureate from Columbia University Mr Stiglitz and to what Europe is going to look like after the pandemic's over of course, but even after this weekend. The opinion polls point to an end of an era in the German elections this Sunday, with the retiring Angela Merkel's CDU party likely to be beaten by Finance Minister Olaf Schultz's centre-left SPD and an alliance of partners. The exact make-up and division of jobs within that alliance is not clear but it would include a pretty strong role for the Green party, and one's got to wonder in which direction such a coalition would lead Germany... and by extension Europe, though its European partners may not always love the idea, where Germany leads Europe tends to follow.

We have got to be careful here to differentiate between monetary and fiscal issues. When boss of the ECB, Mario Draghi was able to stifle opposition from more hawkish colleagues (particularly from the Bundesbank) and implement his super-easy, "do what it takes" monetary policy. But in deciding upon Europe's fiscal framework, Germany has led the way and been seen as the most ardent stickler for adhering to the rules on borrowing etc.

*** NOTE: Stickler it may be, but in 2004 Germany itself ran a fiscal deficit of 3.7% of GDP (the limit being 3.0%). It's a fact that sceptics of the Euro project used to make their point that if even the strictest follower of the rules was prone to bending/breaking them when it suited them, then what long-term hope was there for the Euro?

The point implied by refence to Germany's election is that a new government of a very different stamp is likely to be happier to loosen the fiscal taps than its predecessors. Of course, the Covid pandemic and multiple subsequent recovery programmes have torn up the old rule book concerning spending and debt to GDP ratios anyway, but the question is whether Europe should be looking to revert to something like its puritan, pre-pandemic norm once the storm has passed? The answer to that according to Mr Stiglitz... and this is an opinion piece, remember... is an emphatic NO.

Italy's economy has been one of the worst hit by the pandemic, which came after 20 years of economic contraction since adopting the Euro. Emergency measures will see €235bn of new investment which will give the country a real chance of meaningful recovery, and ultimately prosperity. Poorer EU members in the south and east of the Eurozone will hope that similar investment comes their way. The old regime was always skewed towards the wealthier nations - it's much easier not to borrow from others when you've got plenty of your own - and any move back towards the kind of austerity favoured by fiscal hawks would be disastrous.

Besides, the old rules and ratios have been discredited, we're told. Ireland and Spain for example, who had followed the old rules religiously, were two of the worst hit in the 2008 crash. It turned out that the rules that they had followed so assiduously did not protect them one bit. The target ratios were just numbers chosen out of thin air without any particular justification that weren't appropriate for the majority back in the day, and if they were applied now to nations stretched to the limit already could only be achieved by higher taxation and lower welfare. Such austerity would punish those least able to afford it, destroy the social cohesion necessary for recovery and fan the flames of political extremism already worryingly evident across Europe.

Ah, politics, politics... but let's get back to some numbers. Surely there's got to be some fiscal responsibility  In La La Land, we'd all like to dole out the cash but in the real world you can't borrow and spend like drunken sailors on shore leave without eventually coming to a very sticky end. Of course not, Mr Stiglitz would say, but there are two ways of reducing a debt to GDP ratio: one way is to reduce the debt - that's called austerity, the EU tried that 10 years ago and it was a big mistake. The other way is to increase GDP - that's achieved by investment and it's what the US did post-WW2 and it worked pretty well for them.

One might think that that Mr Stiglitz's opinion is attractive for the socially and politically inclusive aim at its core, and you might think his economic argument perfectly valid. On the other hand, one might say it's naïve and economically-speaking a recipe for excess, inflation and very hard times indeed. Whatever the case, it's hard to see the Frankfurt heavyweights buying too much into his ideas, even with a change of federal government. But then again, it's equally hard to see things reverting to how they were before Covid - that ship had plenty of problems pre-pandemic, and doesn't look like the right sort of vessel to navigate the stormy seas ahead of us now.