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Spend, or the populists will

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Spend, spend, spend when you have money to spend — or the populists will do it in your place.

Thats what European governments who have any fiscal leeway available should do, according to a new report published Friday and seen by POLITICO and the German newspaper Welt.

Holger Schmieding, chief economist of Berenberg bank and author of the study, calls it the “Polish fate,” citing the reluctance of the previous Polish government led by Donald Tusk (now president of the European Council) to spend all the money it had available, only to see those savings squandered by the Law and Justice party (PiS) government that took over in 2015.

For the report, called European Progress Monitor, Schmieding and his colleague Florian Hense carried out an extensive investigation into the state of the EU economy, examining the health of all 28 member countries as well as their level of ambition when it comes to reform.

In Poland, the relatively spendthrift PiS introduced expansive new measures such as costly pension entitlements, which have not so far hurt Polands fiscal position — significantly better than the EU average at present — though they will have a long-term impact.

“People in Europe are actually doing better” — Jean-Claude Juncker

Other countries at risk of the “Polish fate” are Ireland, the Netherlands, to some extent Denmark, and Germany, according to Schmieding. In these countries, the Berenberg economist said, it would be “better to act preventively and make sensible use of the leeway, for example by spending more on early childhood education or infrastructure, especially in rural areas.”

Among the worlds three major economic blocs, Europe is considered the weakest link — not least because of the weakness of its components. Some EU countries suffer from political paralysis, others face fiscal or demographic challenges and others lag behind in technology, lending some credence to U.S. President Donald Trumps bout of Euro-bashing in 2018 and his dismissive year-end comment, regarding Europe, that “I dont care.”

Schmieding argued, on the other hand, that “Europe is better than its reputation. Much is going in the right direction.”

For Jean-Claude Juncker, the glass is definitely more than half-full.

“Employment and real wages in Europe are heading in the right direction” — Holger Schmieding, Berenberg banks chief economist

A beaming European Commission president told reporters earlier this week that, under his leadership, “240 million people are employed in Europe today. When we started, as the Commission, the employment rate was 69.2 percent. We are now at 73.5 percent and we think we will have raised the employment rate to 75 percent by 2020.”

“People in Europe are actually doing better,” Juncker said. “Not everyone notices that because wealth and prosperity remain distributed differently.”

Thats a finding that the report backs. The differences from country to country are considerable and often surprising.

Delayed reaction

Some countries perform well in terms of both economic health and reform zeal, according to the Berenberg study — Ireland and the Netherlands, for instance.

Others, such as Finland and Sweden, enjoy a good reputation that is not matched by enthusiasm for reform, said the report. Very much at the back of the class are countries that perform poorly with no sign of improvement, such as Romania. [In coming days, POLITICO and Welt will be selecting some countries for case studies in the light of the report.]

Schmieding considers it important to use the fiscal leeway available — firstly, to compensate for structural weaknesses; secondly, to counteract the ongoing slowdown in the European economy; and, last but not least, to counter the populist wave.

“Employment and real wages in Europe are heading in the right direction,” said Schmieding. “But it takes time for such developments to be reflected in the mood of the citizens.”

If Europe has made little progress in this regard, it may be because there is no mechanism in place to ensure that only the fiscal leeway available is used. Take Germany, for example, which Berenberg ranks second in the EU in terms of economic fitness, but 20th when it comes to reformist elan. Germany clearly has scope to invest more because of its high — though shrinking — public surpluses. Moreover, according to Schmieding, “the share of unproductive … government spending in Germany is far too high compared to other countries.”

Others use leeway that they dont have.

Take France. Emmanuel Macron began reforming the country before he was elected president in 2017, as economy minister under François Hollande. His reforms of labor market and labor law, initiated in 2016, are beginning to take effect.

After 12 long years of stagnation, unemployment fell to 8.8 percent in 2018 and, according to a European Commission forecast this week, will continue to fall in 2019 and 2020. “A far above-average figure for the most recent structural reforms offers reason to hope that France can make progress in the coming years,” says the report.

But in France, government spending in relation to economic output continues to be higher than anywhere else in the EU, and government debt is also at the upper end of Europes range, at 99 percent.

In 2019, France is likely to violate the deficit targets in the Maastricht Treaty for the first time since 2016 with a 3.1 percent shortfall. However, as one senior EU official noted, France “has no problem financing itself cheaply on the market, unlike Read More – Source

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