In Europe, there are signs of fiscal policy changes to support growth, but in the United States, President Trump's policies continue to create divisions.
In the eurozone, there has been just a little movement on the fiscal policy front. But let's not get carried away. Some fiscal relaxation is likely in the future, and this, in turn, will help the region's economies. Olli Rehn, the Finnish central bank head on the European Central Bank's governing council, has called on governments to help deliver a better balance of economic policy, noting that "it is evident that the role of fiscal policy is stronger when the effective lower bound is binding." Some fiscal policymakers have taken note of this.
This is clearest in the Netherlands, where the government announced a fiscal loosening of about 1% of GDP for 2020. This breaks the national fiscal rule. However, because of the Dutch government's strong overall fiscal position, it is compatible with the European Union's Stability and Growth Pact. The government also announced a multiyear investment fund that will spend on projects designed to raise long-term growth. Obviously, given the size of the Dutch economy in the eurozone context, this 1% of national GDP doesn't amount to much, but it is an important political signal.
Greens in Germany lead the way
In Germany, politics are going through a transformation but at a slower pace. In late September, Chancellor Angela Merkel's government unveiled a $60-billion package of climate policies. The "green investment" plan may well boost the flagging economy over the long term. The measures, however, will be financed without changing Germany's overall fiscal position. During the debates leading up to this set of investments, two things became clear. The first is that the finance ministry is beginning to relax a little and, if the economic outlook continues to deteriorate, some kind of fiscal stimulus will take place.
The second is that, unlike other European countries where the main threat to the centrist parties comes from the populists of the right and the left, in Germany the main threat is coming from the Greens party. At the margin, the Greens are much less attached to the idea of strict fiscal discipline than the mainstream parties. So, over time, we are likely to see some relaxation in the German approach to public finances.
Trump's tweets and trade
The trade war continues, and market concerns about it continue to wax and wane. In addition to the U.S.– China trade conflict, there has been a long running dispute at the WTO involving Airbus and Boeing and the extent to which their commercial airliner operations are subsidized. This case started more than a decade ago, and the United States won the right to impose tariffs on as much as $8 billion worth of EU goods; the EU has said it is considering the use of a different WTO ruling to retaliate with tariffs on $4 billion of U.S. goods. The threat of tariffs on imports of European vehicles remains, although it seems unlikely tariffs will be imposed in the near future. Again, this illustrates a key feature of the Administration's trade war and the uncertainty it is imposing on the business sector.
Beyond this, the trade war story continues as it has. The channels of communication between Beijing and Washington seem to be more open than they have been. In early October, the United States and China agreed on the outlines of a partial trade accord that President Donald Trump said he and his counterpart Xi Jinping could sign as soon as next month. Still on any given day, a tweet — or news of a Chinese delegation cancelling a visit to Montana — can move markets.
A short-term deal would lower tensions for a little while, but the key issues behind the conflict are not going to be resolved. China will not give much ground on the key issues of the structure of its economy and the role of its high-tech sector. Trump has every reason to find reasons to keep the issue on the boil. These incentives will only increase as the 2020 elections approach.
Unconventional policy approaches aimed at China
The latest twists in the policy debate link together other strands of thinking. One of the proposals on Capitol Hill included imposing a "market access charge" on foreign purchases of U.S. securities. The White House was also discussing other measures aimed at China, including limiting the ability of the $50 billion Federal Employees Retirement System to invest in the MSCI All Country World ex-U.S. Index.
The underlying story is two-fold. First, the toothpaste is out of the tube now. The Trump Administration has allowed space for unconventional approaches to policy, and as a result, a lot of ideas are being floated. Many of them are bad, and most of them probably won't get anywhere.
But it's hard to rule anything out. If the impeachment process does boost the left wing of the Democratic Party, we'll have to deal with unconventional ideas from both ends of the political spectrum. The centrist politicians who supported the policy consensus of the post-Reagan years are disappearing along with the policies they supported and the economic growth they made possible. Moreover, it is true that the emergency economic powers of the President are extraordinarily far-reaching.
Moreover, it is true that the emergency economic powers of the President are extraordinarily far-reaching.
Second, the trade conflict with China found an unusually broad coalition. The fact that China has not yet offered Trump the kind of deal he wants suggests a new phase is quite likely. Trump has emboldened all sorts of people who are unhappy with China for one reason or another. There are the "trade deficits matter" people and the "national security" folks. There are the "intellectual property" folks, and there are the "workers suffering job/wage losses" folks. Key leading figures in the Democratic Party are protectionist and hostile to China. So, it's likely that the relationship with China will be difficult no matter who wins next year's election.
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Global growth will remain sluggish this year as protectionist tariffs continue to rattle manufacturers, businesses, and financial markets.