High government debt no longer rules out fiscal policy easing, as EU member states and authorities are now paying more attention to counter-cyclical fiscal policy than fiscal sustainability considerations.
However, despite room for further fiscal easing in some countries, we still doubt we will see a larger fiscal policy response in a scenario of a severe recessionary shock. Currently, the countries with the largest fiscal room are those that do not need the easing.
We believe fiscal policy easing is likely to play a bigger role going forward, which should be welcomed under the current climate of 'central bank fatigue'.
A significant fiscal easing in the euro area depends largely on Germany, as it is the largest euro area economy and as it is one of the countries that is not eventually bound to bring down an unsustainable debt.
German politicians seem less willing to ease fiscal policy due to the cyclical situation but the public is in favour of spending public money on stimulating private sector investment at the EU level.
This suggests that German fiscal policy could be used to a larger extent going forward. Nevertheless, we do not believe in a considerable fiscal easing in Germany because of the current fear of overheating the economy.
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