"Although it will take time for the positive effects to work their way through the economy, the size of the fiscal effort (around 3.3% of EU GDP or over €400 billion) will generate new investments, boost demand and create jobs," read draft summit conclusions obtained by EurActiv.
The draft echoes an earlier statement from France and Germany, which have refuted claims that Europe is not spending enough to fend off the crisis. "With a total of over 400 billion euro (around 3.3% of the EU's GDP) […] Europe is at the vanguard in the fight against the recession," reads a joint letter by German Chancellor Angela Merkel and French President Nicolas Sarkozy (EurActiv 18/03/09).
"At the European Council, we should give our citizens, our partners and the business community a strong message of confidence in the size and efficiency of our recovery plans," the two leaders add.
Surprise Fed move puts pressure on Europeans
The Franco-German letter comes amid transatlantic divisions over the G20 priorities, with Washington focusing on increased government spending and some European governments stressing regulation as a priority.
The US Federal Reserve on Wednesday (18 March) announced a surprise move to inject a further $1.2 trillion into the US economy, mainly by buying up mortgage-backed securities and $300 billion worth of US government debt, to boost lending and promote economic recovery.
In January, the US had already passed President Barack Obama's $819bn economic stimulus package, putting pressure on Europeans to do more to help restart the global economy.
However, EU leaders are to reject these claims at their two-day summit starting today (19 March).
In a statement on Wednesday (18 March), European Commission President José Manuel Barroso said the different stimulus plans adopted by EU countries "now look set to approach 4% of EU GDP," if "automatic stabilisers such as unemployment benefits and state-funded healthcare" are included in the statistics. He described economic stabilisers as "a rapid and efficient way of maintaining demand and preventing further job losses," which should therefore be counted as part of the European recovery plan.
In December last year, EU leaders approved a €200 billion European Economic Recovery Plan representing 1.5% of GDP. But the leaders will contend today that social benefits, which are part of Europe's "social model", will double this amount to "over 400 billion euro" or "around 3.3% of the EU's GDP," a figure closer to the massive US stimulus package.
"No-one can claim that [Europe's] public spending is insufficient," said a senior European diplomat. "We have reached the limits beyond which the sustainability of public finances cannot be maintained," he added, saying the G20 summit in London should avoid focusing the debate on recovery efforts versus measures to regulate the financial system.
Krugman calls for greater fiscal stimulus
Paul Krugman, a Nobel Prize-winning economist, on Tuesday (17 March) described Europe's response to the economic crisis as "entirely inadequate," suggesting that the continent needs a "large and sustained stimulus package to get out" of the crisis.
He pointed out that the American economy had recovered from the Great Depression "with a little fiscal expansion called World War II," which he said gives an indication of "the size of the stimulus needed". The European stimuli, all well below 4% of GDP, are "entirely inadequate," he stressed.
Focusing on the euro zone, Krugman said "there is a problem with competitiveness," describing Europe's current account deficit as "unsustainable". He also criticised the euro zone's labour mobility policies, saying the region's relative lack of labour mobility compared to the US had "not helped" the bloc to deal with the recession.
Responding to Krugman's allegation that Europe was a "continent adrift" that is "lacking leadership", EU Competition Commissioner Neelie Kroes said: "We don't get out of this crisis by dreaming about systems that we don't have." She argued that the Commission has been successful in defending the single market "against the dangers of protectionism," which is important to prevent Europe from "going backwards".
