The announcement of a new and contrasting fiscal program in Germany and France is really puzzling and could be a fiscal drift for the zone.
It has indeed raised the eyebrows and markets are concerned if the Germany’s fiscal move could mean too soon to a restrictive stance, that it could be deflationary and potentially derail recovery. The European Commission explicitly asked EU members for a 1.5 percentage points or more discretionary fiscal boost last November.
On the other hand, France’s announcement that it is going to launch a new borrowing program to finance growth-enhancing measures is a concern for the opposite reason – that higher debt ratios may impart an inflationary bias.
The resulting debt dynamics need to be addressed. The implementation of multi-year deficit reduction plans seems unavoidable to prevent adverse market reaction as well as to comply with existing Stability and Growth Pact rules.
France appears to be an outlier at this stage. In addition to the announcement of a likely longer timeframe for reducing its deficit/GDP ratio, France has also announced its intention to launch a new borrowing program to fiancé ‘good’ public expenditure.
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