Markets Cycles Part 3: The European Slowdown

The previously discussed condition of Germany, with its economic difficulties, are analogous to the rest of the major European countries as well. Years of economic growth are coming to an end as the continent faces a very sudden and unexpected economic slowdown. Whether by accident or by direct design, the budgets of varying countries have loosened up far more in favour of economic stimulus. This is to the approval of economists, who believe the injections to be well-timed.

Previously the responsibility to provide the continent with fiscal stimulus fell upon the ECB, and its quantitative easing policy. Yet in light of the recent pessimistic economic figures, the Central Bank alone will not be sufficient, most particularly in the struggling industrial sector. Although these would be budget changes are not comparable to the headline-grabbing President Trump tax cuts, they are substantial enough to prevent a major economic recession, according to the European Commission. 

By the end of 2018, the Eurozone’s three biggest economies, Germany, France and Italy all had fiscal stimulus worth at least 0.4% of national income for the year 2019. As a comparison, the US has spent about four times as much between 2017-2019 on fiscal stimulus (as a factor of GDP). It is important to highlight however that although the trend to fiscal stimulus is more or less universal throughout the different nations, it does not in the least resemble a coordinated and targeted attempt to fight an economic slowdown. Recently France reversed its short-lived fuel tax increase. Combine this with the support for poorer pensioners and the nations fiscal deficit was pushed up to such a degree that they exceeded the EU’s borrowing limit of 3% of national income. The Italian government publicly recognizes the need for fiscal flexibility in order to boost the incomes of the poor and meet election pledges made by populist leaders. Yet the specific details of the budget have led to a standoff with the European commission. Finally, Germany introduced new tax incentives for investments, which strictly contradicts its former ‘Black-Zero’ policy of always running a surplus. 

It would appear that slowly the sentiment towards immediate action is being shared across the major institutions. In combination with the aforementioned fiscal stimuli, the ECB has stated the possibility of longer-term refinancing operations of European Banks. This recognition of an extended slowdown resulted in the Euro falling to its lowest level since November 12, 2018, as foreign exchange markets responded to the news. 

Editing by Tom Handels