Shifts & Narratives #19 – The fiscal illusion: no free lunch for investors

June 3, 2022

The conversation regarding whether there is room for more aggressive fiscal policy is a hot political topic today. In the US, the debate is likely to become even more inflamed as we approach the midterm elections. In fact, these are at risk of becoming an evaluation of President Biden’s policies in light of the excessive fiscal spending carried out in response to the Covid pandemic (and its subsequent impact on the economy).

On the one hand, fiscal expenditure has been identified as a leading cause of higher inflation. On the other, greater spending may be required should the US economy decelerate more than expected, particularly as voting day is rapidly approaching. Likewise in Europe, greater fiscal action is required to subsidise skyrocketing energy costs and to limit the economic impact of the Ukrainian conflict. At the same time, concerned voices are being raised as to whether harmonised Stability and Growth pact rules are still appropriate for the Union.

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