Euro area fiscal plans show continued moderate boost to activity

Euro area member states recently submitted their Draft Budget Plans for 2019 to the EU Commission as part of the fiscal surveillance framework.

Viewed collectively, the Euro area member states’ draft budgets point to a fiscal easing of 0.3% of GDP in 2019 at the area-wide level. Relative to the plans embodied in the Stability Programmes published in May, the key changes owe to Italy. The new Italian government now proposes a fiscal easing of close to 1% in 2019, compared with the tightening of 0.5% of GDP foreseen in May. The German fiscal stance is also projected to be easier in 2019.

Our fiscal assumptions differ from the member states’ draft budgets owing to our own judgmental adjustments. We expect the fiscal stance to be easier in Italy in 2019 than the draft budget implies; we have broadly similar assumptions for Germany, France and Spain as embodied in their draft budgets. Applying our fiscal multipliers — where we distinguish between expenditure and revenue measures, as well as between higher- and lower-debt countries — to our fiscal stance assumptions points to an area-wide fiscal boost of around 0.2pp-0.3pp in 2019 and 2020, similar to the boost in 2018. This is close to our existing assumptions.

We use lower fiscal multipliers for high-debt countries such as Italy. Yet these multipliers still imply that a fiscal easing boosts growth. However, given the very sizeable rise in Italian spreads related to their budget announcement, we think that the fiscal multipliers for Italy currently are closer to zero or perhaps even negative. The area-wide fiscal stimulus may therefore be overstated.