European Commission Calls for Boost to Investment, Euro Falls Further

Talking Points

- European Commission argues for more positive fiscal stance for the Euro area

- EC says Spain and Portugal 2017 budgets are at ‘risk of non-compliance’

- Euro falls further against the US Dollar, in at fresh 2016 yearly lows today.

The European Commission has again called on European Union member states to boost the sluggish EU economy through fiscal policy: the use of government spending and income, largely from taxes and borrowing, to lift economic growth.

In the latest assessment of the EU budget and the budgets of member states, Commission President Jean-Claude Juncker writes that: “The 2017 European Semester we start today will be decisive for Europe to manage its economic and social turn-around.”

He added: “I believe we can do it. This is why today the Commission is recommending a positive fiscal stance to support the recovery and the monetary policy of the European Central Bank, which should not bear the burden alone. Every member state should play its part: those that can afford it need to invest more, while those which have less fiscal space should pursue reforms and growth-friendly fiscal consolidation.”

The EC’s argument has similarities to the plans put forward by US President-Elect Donald Trump, who has proposed swinging tax cuts, while also saying that health and retirement programs should be protected. Meanwhile, the Commission has described the draft budget plans of Spain and Portugal as “at risk of non-compliance” with the requirements for 2017 under the EU’s stability and growth pact.

While, theoretically, looser fiscal policy makes tighter monetary policy more likely, and is therefore positive for the Euro, the currency fell further in Europe on Wednesday, with EUR/USD dropping to just under 1.07 to record its eighth successive daily loss against the US Dollar, which just hit a 13-year high (via DXY).

Chart 1: EUR/USD 5-minute Chart (November 15 to 16 Intraday)

Read more: Dollar Index Breaking Range at 13-year Highs as Yields Run Up

--- Written by Martin Essex, DailyFX Research

To contact Martin, email him at martin.essex@ig.com