EU-Digest/DW: Euro-zone fiscal policy sound: "It is easier to reduce interest rates in a timely way than to fiddle with tax schedules"

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Euro-zone fiscal policy sound: "It is easier to reduce interest rates in a timely way than to fiddle with tax schedules"

Data to be released Friday is forecast to show inflation in the 15-member euro zone slipped to below three percent for the first time in more than 12 months in November, paving the way for a possible rate cut next week. Analysts expect the European Union's statistics office to report that annual inflation in the euro zone dropped from 3.2 percent in October to 2.7 percent this month as falling oil prices have undercut inflationary pressures. This leaves euro-zone inflation still above the European Central Bank's (ECB) two-percent target for annual inflation. But leading ECB officials, including bank chief Jean-Claude Trichet, have signaled that the ECB's 21-head rate-setting council was gearing up to ease monetary policy further when it holds one of its regular-out-town meetings in Brussels next Thursday.

Note EU-Digest: The Economist reports that according to the European Commission the euro area’s collective budget deficit was 0.6% of its GDP last year, a picture of health compared with America (approximately 7%) and Britain (4%). Therefore there is some obvious reluctance in Europe to prime the fiscal pump. The orthodoxy for three decades has been that monetary policy is the best tool to manage the economic cycle. It is easier to reduce interest rates in a timely way than to fiddle with tax schedules. Furthermore, there is still room to loosen monetary policy in Europe: even after recent reductions, interest rates are 3.25% in the euro zone and 3% in Britain. Europe also has a more solid fiscal buttress. The public sector accounts for a much bigger slice of GDP so a drop in private spending has proportionately less impact on the economy than in America where it is 70%. State benefits for the unemployed are larger than in America, so public spending rises by more in a downturn. Tax receipts are bigger too and they tend to fall quickly in downturns, providing an automatic fiscal relief for taxpayers. It is therefore not good practice for Europe to copy US fiscal policy.