Focus Paper no. 1 / 3 January 2017

The Focus assesses the public finance objectives set out in the Draft Budgetary Plans (DBPs) of the 18 countries in the euro area at mid-October (Greece, as it is in a macroeconomic adjustment programme, did not submit its DBP), then examines in greater detail the budget strategies adopted by the area’s main economies: Germany, France, Spain, the Netherlands and Belgium (for Italy, please see the 2017 Budgetary Policy Report from last November).

The Focus emphasises that all of the forecasts indicate that once again the economic recovery in euro area will remain weak this year and that cyclical conditions will retain their negative cast. Following its autumn examination of the Draft Budgetary Plans (DBPs), the European Commission found that overall the fiscal stances of the euro-area countries will remain neutral in 2017. According to the Commission, however, conditions in the area would justify a “moderately expansionary” stance, quantified for the first time by the Commission as one half of a point of GDP for 2017.

The analysis prompted the following observations.

• None of the 18 countries is at serious risk of non-compliance with the Stability and Growth Pact (SGP): in ten cases the DBPs were either fully in compliance (Germany, the Netherlands, Luxembourg, Estonia and Slovakia) or broadly in compliance (France, Ireland, Latvia, Malta and Austria) with the SGP; for the remaining eight countries (including Belgium Italy and Spain), the Commission considers compliance to be at risk.

• The reduction of deficits and public debt in relation to GDP continues, with deficits falling on average from 2% in 2015 to 1.4% in 2017 and debt declining from 91.2% to 88.9% of GDP for the countries considered; only Spain has a deficit/GDP ratio of more than 3%,while 12 of 18 countries have a debt in excess of 60% of GDP.

• In 2016-2017, structural deficits are expected to deteriorate slightly on average (by about 0.1 percentage points per year); this means that the reduction in the headline deficit is attributable to the improvement in cyclical conditions.

• The size of the structural adjustment or easing varies considerably from country to country. At the extremes, Cyprus forecasts an average structural easing of 1.8 percentage points in 2016-2017, while Malta envisages an average structural adjustment of about 1 percentage point. Italy’s annual easing as set out in the DBP (0.5 percentage points) is larger than the area average.

• In a number of countries (Italy, Germany, Finland and Luxembourg), the deterioration in the structural balance in 2017 appears linked, albeit to different degrees, to the goal of imparting an expansionary orientation to fiscal policy in what are projected to remain challenging economic conditions (counter-cyclical policies). Two countries (Cyprus and Latvia) plan to implement pro-cyclical expansionary policies, while in five of the countries that have adopted restrictive stances (including Spain) the policies appear counter-cyclical and in three countries (France, the Netherlands and Belgium) they are pro-cyclical.

• Focusing our attention on the main euro-area countries, despite a slight structural easing and in contrast with a stability programme that envisaged budget balance, Germany has set an objective of achieving a headline surplus in 2016-2017, while France has retained its commitment to reducing its deficit/GDP ratio below 3 per cent by 2017, even at the cost of adopting a pro-cyclical restrictive policy stance. Despite the improvement in economic conditions, Spain is planning to achieve this goal only after 2017. Finally, the Netherlands are continuing to adopt a slightly restrictive fiscal stance despite the budget scope available to it and an output gap that is still negative, while Belgium intends to pursue consolidation in 2017 in order to offset the expected overshoot in 2016.

• The use of the current account balance alongside the output gap as an indicator of the cyclical position of the individual countries and the euro area confirms the need in 2017 for an expansionary fiscal stance of the euro area as a whole. The more expansionary orientation should first involve countries – like Germany and the Netherlands – that have a negative output gap and significant current account surpluses (respectively 8.7% and 8% of GDP in 2017).

Text of document (in Italian)