Euro area: will fiscal policy become a growth risk again?

Under current plans, fiscal policy is set to become mildly contractionary for the euro area this year and next , after providing strong support for the economy in 2020 . This bring s back bad memories about the euro crisis, during which a pre-emptive tightening of fiscal policy contributed to the deterioration of the economic outlook in the periphery , leading to an existential crisis for the monetary union . The situation, however, is quite different today. For one, government spending under the Next Generation EU program will compensate lower spending on the national level, leading to a broadly neutral fiscal stance. More importantly, the private sector does not face the same underlying imbalances than prior to the euro crisis. The predominant task of fiscal policy now is to provide “bridge financing” until lockdown measures are softened again. Going forwa rd a focus for fiscal policy should be to address any liquidity problems the corporate sector may face. Overall, fiscal policy will not be an outright risk factor for the recovery , not least as many support schemes will remain in place providing a safety net at the early stage of the recovery. That said, fiscal policy is also unlikely to provide a significant boost to growth this year.