ECB President Mario Draghi’s press conference statements always end by stressing the importance of “full and consistent implementation of the Stability and Growth Pact”. The words ring hollow because the ECB’s monetary largesse has encouraged governments to abandon fiscal consolidation.

The first chart shows the EU Commission’s estimates of the Eurozone structural or cyclically-adjusted budget balance, expressed as a percentage of GDP*. The structural deficit was cut by an average of 0.8 percentage points (pp) of GDP a year between 2010 and 2014. It widened, however, by 0.1 pp in 2015 and is projected to increase by a further 0.2 pp in 2016.

The rise in the deficit is at odds with revised guidelines on the implementation of the Stability and Growth Pact (SGP) published in January 2015. These guidelines link the required annual fiscal adjustment in a country to the level of GDP growth and size of the “output gap” (i.e. the deviation of GDP from potential). The Eurozone output gap was -1.8% in 2015 while GDP grew by more than potential, according to the EU Commission. Under these conditions, governments are required to strengthen the structural balance by 0.25-0.5 pp of GDP**.

The EU Commission expects GDP growth to exceed potential again in 2016, with the output gap narrowing to 1.1%. The recommended annual improvement in the structural balance under these conditions is at least 0.5 pp of GDP.

The rise in the structural deficit in 2015-16 would be larger but for a fall in debt interest costs caused mainly by the ECB’s policy actions. Eurozone debt interest is projected by the EU Commission to fall by 0.4 pp of GDP between 2014 and 2016 – second chart. Excluding interest, therefore, the structural balance is expected to deteriorate by 0.6 pp in 2015 and 2016 combined.

So governments have spent the interest windfall gifted to them by the ECB and engaged in additional fiscal loosening, despite Eurozone gross debt standing at 93.5% of GDP at end-2015 – far above the 60% maximum stipulated by the SGP.

The change in trend of the structural balance in 2015 coincided with the ECB launching QE. The ECB’s bond-buying removed any remaining market discipline on national fiscal policies. Financing costs for high-debt countries have plunged and governments have moved swiftly to reverse earlier consolidation. Excluding interest, structural deficits in Italy, Spain and Portugal are projected by the EU Commission to widen by 1.1, 1.3 and 1.8 pp of GDP respectively between 2014 and 2016.

The hypothetical Martian visitor would surely conclude that the ECB has engaged in monetary financing of peripheral governments, notwithstanding Mr Draghi’s casuistic protestations to the contrary.

The Draghi monetary striptease will become yet more daring this week. His actions are unlikely to stimulate the economy but will provide further titillation for debt-addicted Eurozone governments.

*The structural balance also adjusts for one-off and temporary measures.
**The recommendation is 0.25 or 0.5 pp depending on whether gross debt is below or above 60% of GDP.