Commission tables 200 billion euro ‘recovery plan’

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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 ‘toolbox’

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”.

‘Smart’ investments

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.” 

In Germany, where Chancellor Merkel is under pressure to do more to restart the economy, a government spokesperson reaffirmed that the country's existing €32 billion stimulus plan would be enough as a contribution. "We assume the current package will be sufficient," Thomas Steg said, according to Reuters.

The EPP-ED, the centre-right group in the European Parliament, welcomed the EU recovery plan for proposing "the right toolbox to tackle the current economic crisis".

"For my group, the priority must be to protect Europe's citizens from the worst effects of the financial crisis," said Joseph Daul MEP, chairman of the EPP-ED Group. "Sacrifices cannot be avoided but, together with President Sarkozy and Chancellor Angela Merkel, our group believes that governments have to head off a recessionary spiral."

In particular, the EPP-ED "welcomes the fact that the Commission has based its response on the priorities of the Lisbon Strategy for growth and jobs". "We agree with the Commission's position that a budgetary stimulus should be provided, but not without structural reforms in the member states who should take measures to boost their economies without increasing their deficits. This is why we favour the idea of euro-bonds," Daul said.

Poul Nyrup Rasmussen, president of the Party of European Socialists (PES) welcomed the Commission's recovery plan, saying the EU executive had "listened to us and is going in the right direction".

However, he added that the plan had "two big flaws". "The first is that 1.5% of GDP in two years is almost certainly not enough to keep down unemployment. Our calculations are that you need at least 1% of GDP every year for three years to keep unemployment at current levels. The second is that [German Chancellor] Angela Merkel and other conservative leaders such as [Italy's Silvio] Berlusconi may well water down the plan and refuse to make the necessary national investments."

ALDE, the liberal group in the European Parliament, said it was "pleased" that the European Commission reaffirmed the principles of budgetary discipline in its recovery plan and applauded efforts to fight the recession with "green investments and green growth". However, it urged the Commission to "resist unnecessary subsidies for industry" and "not to allow the temptation to return to the past".

John Purvis, a UK Conservative MEP who is vice-president of the European Parliament's economic and monetary affairs committee, said the EU plan was "the wrong answer for Britain, which already has exceptionally poor public finances".

"The European Commission seems more eager to be seen to do something, rather than actually helping solve the immediate concerns of families and small businesses," Purvis said. "I am sorry to hear the European Commission suggesting that Britain's example should be followed by others."

BusinessEurope, the EU employers' association, welcomed the Commission’s recovery plan but questioned whether it would be enough. The business group called for "a clear commitment by member states to deliver economic stimulus measures amounting to at least 1.2% of their national GDP in 2009". In a veiled reference to Germany, it added that the effort could be "more for those which are able to do so".

UEAPME, the European SME employers' organisation, welcomed the recovery plan as "a strong signal" of the Commission's commitment to tackling the crisis and urged member states to back it. The SME organisation said it "particularly appreciated" the proposed additional measures to secure access to finance for SMEs, as well as proposals to "speed up the reduction of VAT rates for labour intensive services and to cut labour taxes at the low end of the wage scale".

However, UEAPME was "less satisfied" with the social chapter of the plan, saying it "does not mention the consequences of downsizing in large enterprises for smaller service providers, suppliers and subcontractors".

SME Union, an organisation representing small businesses for the centre-right European People's Party (EPP), said the EU recovery plan was "a first step in the right direction," welcoming in particular a decision to support small and medium-sized enterprises. 

SME Union President Christoph Leitl called on the European Commission to "speed up its state aid decision-making process" as EU member states will enjoy "a temporary flexibilisation of state aid legislation" under the recovery plan. "The European Investment Bank (EIB) package of 30 billion euro for global loans to SMEs has to be in the pockets of SMEs as soon as possible and the Commission has to help the Member States to make this rapidly possible," Leitl demanded.

Meanwhile, Oxfam, the international development organisation, called on EU leaders "not to forget about poor people in developing countries who are most vulnerable to shocks". "Poor people are already suffering from the impact of higher fuel and food prices," said Elise Ford, acting head of Oxfam's EU office. "EU leaders must unite in a commitment to ensure that overseas aid is not cut in the downturn."

The European Anti-Poverty Network (EAPN) said the recovery plan contained "useful measures which could address the needs of people in poverty or furthest from the labour market". However, the network believes that "without a comprehensive pillar focused on social justice and investment in people, the measures aimed at addressing people in poverty such as increasing benefit schemes are likely to get lost".

EAPN Director Fintan Farrell said the economic recovery plan "assumes that all that is needed are extra measures and more business as usual and that the current crisis is only a temporary blip in a sound economic model".  Instead, he claims the EAPN wants to see a coherent strategy "centered on the rights of people - not just businesses and banks, adding that "we want an open debate on the causes and consequences of crisis so that we can turn this crisis into an opportunity to avoid the mistakes of the past and build a new social and sustainable EU".

Meeting in Brussels on 7 November, EU heads of state and government agreed on the necessity to "look beyond the financial crisis" and take measures to address the worsening economic situation (EURACTIV 7/11/08).

The European Commission was mandated to submit proposals in that direction ahead of the next EU summit on 11-12 December.

On 14 November, the countries of the 15-member euro zone officially entered a recession, recording a 0.2% decline in Gross Domestic Product (GDP) for the second quarter in a row (EURACTIV 14/11/08).

  • 11-12 Dec. 2008: EU summit to decide on the scope and details of the package.

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