Northern Europe in fiscal spending mode


    Throughout 2019, the pressure on economic growth has been a theme among most members of the European Union (EU). In that context, a conservative fraction of the member states has partially surprised, by leading the way towards more public spending.

    The so-called “New Hanseatic League”, which is an informal grouping consisting of some of the northern member states within the European Union, stand for fiscal discipline, a more conservative take on public spending, and a firmer monetary policy. Among the members are Sweden and The Netherlands, where the Swedish parliament has approved more tax cuts in 2020. It should be mentioned, that in Sweden, the tax cuts were a part of a very difficult government coalition negotiation, and it would not come as a total surprise if a Swedish government chose a more flexible approach to the fiscal policy.

    The big surprise was the move from the Dutch government, as the Netherlands really belongs to the fiscal hawks within the EU. In the Netherlands, the fiscal spending also includes tax cuts for the private households, but it is a modest package of EUR 3 billion.

    Though there is also a lot of talk about a huge investment fund or program, which still seems to be on the drawing board, but more details are expected to be released early in the new year. Some speculate that the total amount of the program could reach EUR 50 billion, which is a pretty huge amount in the Netherlands, though the government budget has room for such a significant amount.

    Since the fiscal spending plans were presented in September, it has been seen as a premature action against a further slowdown in the economy. For that reason, I expect that the Dutch government is ready to increase fiscal spending if needed and use the investment programme to fight an economic downturn. Just as important is the signal to fellow fiscal hawk in EU, Germany, because the Dutch move steps up the pressure on Germany to boost spending. So far, nothing has happened, and last 29th November, the German parliament approved the new budget for 2020 that didn’t include any spending spree at all. But on the day after, the coalition partner SPD elected a new left-wing leadership; on this very first day in the seat, the new leadership duo demanded a ten-year public investment program totalling EUR 500 billion – this development will be truly interesting for the financial markets to follow.

    Another source of more public spending will come from the United Kingdom. Currently, it looks like a conservative victory which then generates the next Brexit step. It will most likely increase the uncertainty about the economy for a period, where it’s difficult to determine if this period will be short or long. What seems very certain is that public spending will increase in the UK next year, as all major parties have presented election programs that include more public spending in 2020. The difference is solely by how much the public spending spree will jump.

    However, this tactic needs to create further growth in the first round. The UK does not have unlimited fiscal room and the government debt relative to GDP is already high.

    Furthermore, the UK already has a budget deficit. Looking further into the horizon, investors will consider the British economy as a true single economy after the country has left the EU, which calls for a healthy government budget, though this theme will probably first gain attention in 2021.

    In total, the coming increased public spending will be of decent size, though it would be of significant importance if Germany chooses to shift its stand and opens up for more public spending.

    My primary scenario is that the German government gives in and approves a growth package, which again, could inspire other EU partners to do the same. It could also very well encourage countries like Italy, that don’t have the fiscal power to join the spending party, but that’s another story – all in all, I expect the Northern European spending spree to lift the mood among investors and corporations during the first half of 2020.