The European Commission on Wednesday (26 November) suggested that EU countries should spend billions of euro to kick-start their economies, saying it would tolerate higher budget deficits under strict conditions and for a limited period of time.
The plan proposes a fiscal stimulus of around 1.5% of EU GDP or €200 billion, higher than the €130 billion that had been floated earlier.
Most of the money will be drawn from national budgets, with EU countries asked to contribute €170 billion or 1.2% of the EU’s GDP. The rest – around €30 billion or 0.3% of GDP – would come from the EU’s own budget and the European Investment Bank (EIB).
Presenting the proposal on Wednesday, European Commission President José Manuel Barroso said: “Exceptional times call for exceptional measures. The jobs and well-being of our citizens are at stake.”
EU countries are invited to draw from a “toolbox” that includes measures already adopted by some governments. Some countries have already announced fiscal stimulus plans, including Germany and the UK, that will be taken into account in the EU plan, he added.
Measures listed in the EU’s ‘toolbox’ include:
- Increased support for the unemployed and the poorest households, which have been hit hardest by the economic slowdown;
- Funding large infrastructure projects such as energy networks and broadband internet;
- Temporary VAT cuts across the whole economy, similar to the one adopted in the UK, and;
- Lowering taxes on labour, in particular VAT on ‘labour-intensive’ sectors such as hairdressers and restaurants, a proposal which has been on the table for some time.
The whole package will be presented for approval by EU member states at their summit in Brussels on 11-12 December.
No ‘one size fits all’
But while all countries are asked to contribute, the Commission insisted that “a one-size-fits-all approach […] could not work given member states’ different starting points” in terms of their budget deficits and overall economic situation.
For 2009, the Commission forecasts that budget deficits will vary from nearly 7% in Ireland to a surplus of 3.6% in Finland. In the EU’s biggest member states, the UK is predicted to run a 5.6% deficit, France 3.5%, Italy and Spain just under 3% and Germany 0.2%.
Similarly, there are concerns about deflation in some countries, while there is double digit inflation in others (Bulgaria, Estonia, Latvia and Lithuania), highlighting the need for differentiated measures, the EU executive pointed out.
“Those that have used the good times to achieve stable public finances have most room for manoeuvre,” the Commission said.
Stability and Growth Pact ‘still there’
One of the main elements of the package is that it will allow countries greater flexibility with the Stability and Growth Pact, which limits public deficits to 3% of GDP. “In particular, periods longer than usual to bring the deficit back under the 3% ceiling will be considered,” the Commission said.
But Barroso warned about disproportionate use of the flexibility, saying it would result in “a downward spiral of debt” that would only jeopardise growth in the future. The pact is “part of the solution, not part of the problem,” he stressed.
In a statement, the Commission made clear that it “will always prepare a report” if the 3% of GDP deficit threshold is breached “unless the excess […] is not exceptional, temporary and close to the threshold”.
“The Stability and Growth Pact is still there,” stressed Joaquin Almunia, the EU commissioner for economic and monetary affairs. As proof of this, he announced that such an excessive deficit report would be produced against Ireland “in the coming weeks”.
As a second ‘pillar’ of the recovery plan, Barroso said measures would need to be “coherent” with the EU’s longer term objectives, such as fighting climate change.
The plan, Barroso said, “can turn the crisis into an opportunity to create clean growth and more and better jobs in the future.”
“Smart investment in tomorrow’s skills and technologies will accelerate Europe’s drive under the Lisbon Growth and Jobs Strategy to become a dynamic low-carbon economy for the 21st century.”
“If Europe acts decisively to implement this recovery plan, we can get back on a path of sustainable growth and pay back short-term government borrowing. If we do not act now, we risk a vicious recessionary cycle of falling purchasing power and tax revenues, rising unemployment and ever wider budget deficits.”