- We look at “glitches” which impair fiscal policy in the US and the Euro area. We don’t think the Republican “red line” on a quantum would constrain a decent emergency stimulus that much. How the funds would be allocated is the real issue. In Europe, we count on a “pain balance” unfavourable to Hungary and Poland to unlock the Recovery and Resilience Fund.
Exactly at the time central banks everywhere are acknowledging the centrality of fiscal policy in dealing with the economic consequences of the pandemic, governments are facing difficulties in implementing the next leg of their stimulus.
In the US, we are still waiting for Congress to design and pass an emergency package during the “lame duck” session. We don’t think the Republican “red line” at USD 500bn (2.5% of GDP) – which is probably only an initial negotiating position and may have been eased by Secretary Mnuchin’s decision to “free up” some government money by terminating guarantees to little-used Fed facilities - would not constrain that much a decent emergency package. In our computations, assuming no further “covid wave” after the current one, extending the federal unemployment benefit schemes into the whole of 2021 would cost about USD200bn. Offsetting the estimated loss in states and municipalities’ tax receipts over 2020 and 2021 – which could force an ill-timed fiscal tightening given the prevalence of “balanced budget” rules in a lot of these entities – would cost about USD320bm. True, a more ambitious medium-term programme to spur innovation would be welcome, but it could wait. We suspect that it is not so much the quantum which is blocking the negotiations but the allocation across “red” and “blue” states.
Meanwhile, the EU’s Next Generation plan is again bogged down in the intricacies of the European institutional process. In fact, given the depth of the political implications of this package for the very nature of the EU project, we think that six months from first design as a Franco-German proposal to legislative (near) conclusion is short. Ultimately, the resolution of the current “Hungary/Poland vs everyone else” standoff may depend on a pure “pain balance”. Even if circumventing a veto against the EU’s multi annual financial framework would be complex for the other Europeans, it is possible, while the economic – and probably geopolitical – pain for the two Eastern countries would be significant. For this reason, we remain constructive.