{"id":205310,"date":"2024-04-23T11:00:00","date_gmt":"2024-04-23T15:00:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=205310"},"modified":"2024-04-25T11:49:05","modified_gmt":"2024-04-25T15:49:05","slug":"a-better-macro-policy-framework-for-europe","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/a-better-macro-policy-framework-for-europe\/","title":{"rendered":"A Better Macro Policy Framework for Europe"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\"><strong>The new\u00a0<a href=\"https:\/\/www.consilium.europa.eu\/media\/70386\/st06645-re01-en24.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">EU fiscal rules<\/a>\u00a0and the recently updated ECB monetary policy\u00a0<a href=\"https:\/\/www.ecb.europa.eu\/press\/pr\/date\/2024\/html\/ecb.pr240313~807e240020.en.html\" target=\"_blank\" rel=\"noreferrer noopener\">framework<\/a>\u00a0are tangible signs of the region\u2019s improving macro policy backdrop.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Last September, we outlined&nbsp;<a href=\"https:\/\/www.ssga.com\/insights\/case-for-a-relook-at-europe\">reasons<\/a>&nbsp;why investors should revisit their long-standing underweight exposure to European assets. One piece of our argument was the improving macro policy backdrop in the EU. The new EU fiscal rules and monetary ECB operating framework, both announced in the first quarter, are tangible signs of this.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">With these reforms, fiscal and monetary policy actions that had previously been implemented as one-off responses to crises, have now become forward-looking features of Europe\u2019s macro policy toolbox . Neither reform is a game changer; however, they are steps in the right direction, enhancing the bloc\u2019s ability to manage crises and strengthening its internal cohesion. They improve the sustainability of the Euro and, indeed, the European project as a whole.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-the-new-fiscal-rules-are-simpler-and-account-for-country-by-country-differences-nbsp\">The New Fiscal Rules Are Simpler and Account for Country-by-Country Differences&nbsp;<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">In early February, EU member countries agreed on long-awaited reforms to the EU fiscal rules.<sup>1<\/sup>&nbsp;The reforms are fundamental insofar as they change both the rules themselves and how they are governed.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The prior rules emerged from the eurozone crisis of the early 2010s. Although observers still frequently refer to them by the two nominal limits set for EU members \u2014a 3% of GDP budget deficit, and a 60% debt to GDP ratio\u2014in practice, they were highly complex (both the rules themselves, and how they were applied). Their inability to deliver on the ultimate goal of ensuring fiscal convergence (or even preventing further divergence) made it clear that change was needed.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The top criticisms of the old rules were that they were too procyclical, too complex and too formulaic.<sup>2&nbsp;<\/sup>The new rules are simpler, less procyclical, and therefore more credible and more effective than the old ones. However, building consensus around the new rules took almost a decade, partly because varied debt levels among EU countries meant that one size of reforms did not fit all (Figure 1).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-figure-1-higher-debt-levels-post-covid-19-coud-spur-fiscal-consolidation\">Figure 1: Higher Debt Levels Post COVID-19 Coud Spur Fiscal Consolidation<\/h3>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"455\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2024\/04\/european-fiscal-reform-figure1-1100x455.png\" alt=\"Figure 1: Higher Debt Levels Post COVID-19 Coud Spur Fiscal Consolidation\" class=\"wp-image-205311 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/04\/european-fiscal-reform-figure1-1100x455.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/04\/european-fiscal-reform-figure1-700x290.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/04\/european-fiscal-reform-figure1-300x124.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/04\/european-fiscal-reform-figure1-768x318.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/04\/european-fiscal-reform-figure1-1536x636.png 1536w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/04\/european-fiscal-reform-figure1.png 1626w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/455;\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-the-specifics-of-the-revised-rules\">The Specifics of the Revised Rules<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The fiscal reforms make two fundamental changes:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Individual countries have more ownership of their specific fiscal consolidation paths.\u00a0<\/strong>While previously, countries had to follow a one-size-fits-all path defined by the Commission, the new rules recognise that what is fiscally sustainable can differ among countries. The new fiscal paths will therefore be individually negotiated on the basis of a debt-sustainability assessment that takes a holistic view of a country\u2019s circumstances.<\/li>\n\n\n\n<li><strong>Rules are simplified.<\/strong>\u00a0If compliance was previously judged on multiple fiscal indicators, the new rules focus on just one \u2013 net expenditure.<sup>3\u00a0<\/sup>The chief benefit of using this one metric is that it is observable and thus easier to monitor. The overarching idea is that a simpler, looser, and more flexible approach is a better way to manage fiscal risks within the Union.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">This is not to suggest that the conservative \u201cNordics\u201d have capitulated to the profligate \u201cSouth\u201d. The new rules include a wide range of limits, for example, on the minimum size of the annual fiscal adjustments. What is different is the shift in emphasis. The intent is clearly to reduce the extent of micromanagement by the European Commission. However, the limits prevent the path-setting exercise from becoming a fiscal free-for-all.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-market-and-economic-impacts\">Market and Economic Impacts<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">In the short term, a drag on growth is inevitable, but not because of the new rules; rather, despite them. Since the EU suspended its fiscal rules in 2020 due to the COVID-19 crisis, member states have run fiscal deficits far in excess of the new rules. A fiscal adjustment would have at some point occurred regardless.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In the long term, the effect is more uncertain, but net positive. Most importantly, the reforms strengthen the integrity of the euro and, by extension, the EU itself. They do so in three ways: (1) by modernising the rules to reflect current political priorities; (2) by reaffirming the political commitment to fiscal prudence; and (3) by making it more likely that in a crisis, calls to support the integrity of the bloc will trump concerns over moral hazard.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">All else equal, we expect this reform to soften regional business cycles and reduce the likelihood that countries will drop the euro. This is good for both European assets and the euro in the long run.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-gaps-to-be-aware-of\">Gaps to Be Aware Of<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Even though we see positive impacts on long-term growth, we note the following headwinds to the effectiveness of the rules:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Year 2027 may have a cliff effect.<\/strong>\u00a0Starting from 2028, countries must include interest expenses in their calculations of net expenditure. This leaves fiscal space for highly indebted governments today, but it could result in a fiscal shock later on, particularly if rates stay high.<\/li>\n\n\n\n<li><strong>Power politics will continue to play an important role.<\/strong>\u00a0The new rules do not change the political balance of power within the EU. Larger members will still be able to get away with more exemptions.<\/li>\n\n\n\n<li><strong>Greater politicisation of the fiscal paths.<\/strong>\u00a0Greater national ownership of fiscal paths implies greater influence from the shifting nature of national politics. Incoming governments have low incentives to follow through on fiscal commitments of the government they replace.<br>Moreover, there is a mismatch in timing. The fiscal paths negotiated with the EU will last for four years or seven years\u2014longer than the two years that governments in Europe stay in power, on average.<sup>4<\/sup>\u00a0The problem could be worse in countries with a frequent government turnover. The fact that the new rules exclude national fiscal councils from meaningfully participating in the process is a missed opportunity to reduce this risk.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"https:\/\/www.ssga.com\/us\/en\/individual\/etfs\/insights\/better-macro-policy-framework-for-europe\">Click here to read the full article<\/a><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">&#8212;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Originally Posted April 22, 2024 &#8211; <a href=\"https:\/\/www.ssga.com\/us\/en\/individual\/etfs\/insights\/better-macro-policy-framework-for-europe\">A Better Macro Policy Framework for Europe<\/a><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Footnotes<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><sup>1<\/sup>\u00a0The Council of the European Union (the political body made of minister-level politicians) and the European Parliament agreed the final outline of the rules. This was the last step of the negotiation on the specifics of the new rules. They are expected to be ratified in the current form shortly. See:\u00a0<a href=\"https:\/\/www.consilium.europa.eu\/media\/70386\/st06645-re01-en24.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">st06645-re01-en24.pdf (europa.eu).<\/a><br><sup>2<\/sup>\u00a0The rules were considered procyclical because they encouraged countries to implement more fiscal stimulus when the economy was improving (and tax revenues increased), while they may have caused countries to enact more fiscal consolidation during weaker economies.<br><sup>3<\/sup>\u00a0Net expenditure is defined as government expenditure, excluding one-off revenues, expenditure funded by the EU, and cyclical unemployment claims.<br><sup>4<\/sup>\u00a0There is a wide range, from less than a year in Belgium, Finland, and Italy to over four years in Malta and Luxembourg. Source: Pew Research. \u201cMany countries in Europe get a new government at least every two years.\u201d January 2023.<br><sup>5<\/sup>\u00a0See:\u00a0<a href=\"https:\/\/www.ecb.europa.eu\/press\/pr\/date\/2024\/html\/ecb.pr240313_1~a3a50a9add.en.html\" target=\"_blank\" rel=\"noreferrer noopener\">ECB announces changes to the operational framework for implementing monetary policy (europa.eu).<\/a><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Important Risk Disclosure<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"https:\/\/www.ssga.com\/\">ssga.com<\/a><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"https:\/\/www.ssga.com\/master\/core\/en\/ic\/footer\/state-street-global-advisors-worldwide-entities\">State Street Global Advisors Worldwide Entities<\/a><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Marketing Communication.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors\u2019 express written consent.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The views expressed in this material are the views of the State Street Global Advisors Economics and Macro teams through the period ended April 20, 2024 and are subject to change based on market and other conditions.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor&#8217;s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">All information is from State Street Global Advisors unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.\u202f There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Past performance is not a reliable indicator of future performance.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Investing involves risk including the risk of loss of principal.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>The information contained in this communication is not a research recommendation or \u2018investment research\u2019 and is classified as a \u2018Marketing Communication\u2019 in accordance with the Markets in Financial Instruments Directive (2014\/65\/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><sup>\u00a9<\/sup> 2024 State Street Corporation \u2013 All rights reserved.<br>Tracking Code: 6566921.1.1.GBL.RTL<br>Expiry Date: 04\/30\/2025<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The new EU fiscal rules and the recently updated ECB monetary policy framework are tangible signs of the region\u2019s improving macro policy backdrop.<\/p>\n","protected":false},"author":173,"featured_media":205311,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":true,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[5,18,8,9,26,3],"tags":[313,1685,3598],"contributors-categories":[13643],"class_list":["post-205310","post","type-post","status-publish","format-standard","has-post-thumbnail","category-europe-middle-east-africa","category-macro","category-region","category-securities","category-text-articles","category-traders-insight","tag-europe","tag-macro","tag-market-outlook","contributors-categories-state-street-global-advisors"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v28.0) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>A Better Macro Policy 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