The fiscal plans in Europe

EU member states submit their medium-term budget plans to the EU Commission in May. These are know as the Stability Programmes.

The implied fiscal stance contained in these Stability Programmes across the EMU-4 show a small easing this year, a small tightening both next year and the following year, and more robust tightening in 2021.Owing to recent changes in government in Spain and Italy, the Stability Programmes of these countries, which were drafted by previous governments, may be less useful as a guide to future policy. In the case of Italy, we expect the implemented fiscal stance for next year and the years beyond to differ materially from the stance embedded in the Stability Programmes. Yet we still expect less fiscal easing in Italy compared with the stance implied by the joint policy programme of the government parties (the Five Star Movement and Lega). We expect a only small change to the proposed stance in Spain. In general, we expect an easier fiscal stance in Germany and France over the medium term than their Stability Programmes imply.

Our estimates of the fiscal multipliers in Europe show a higher effect from tax cuts than spending increases, a multi-year fiscal pass-through, and a higher multiplier when economic slack is high. We also find that the growth-boosting effect of fiscal easing is smaller for high debt countries, such as Italy.

Combining this, on our fiscal multiplier estimates and our judgemental forecast for the fiscal stance, the fiscal growth impulse in the Euro area is +0.2% this year, +0.35% next year and +0.3% the year after.