EU to relax budget rules to help kick-start economy

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Member states will be offered “temporary” flexibility to deviate from the Union’s strict budget deficit rules in 2009-2010 under an “economic recovery plan” seen by EURACTIV, set to be unveiled today (26 November) by the European Commission.

The draft plan lists a number of budgetary measures that member states could consider to raise consumer demand and boost the economy.

The exact scope of the plan is yet to be decided upon, but it is widely understood that it will represent no less than 1% of the EU’s Gross Domestic Product (GDP). 

It will be presented for approval by EU leaders at their summit in Brussels on 11-12 December. 

Possible measures listed in the plan include increasing public spending in support of low-income households and boosting investment in large infrastructure projects like energy, as well as temporary VAT cuts and lower taxes on labour.

In doing this, the Commission admits that “member states may be obliged to break the 3% reference value” contained in the Stability and Growth Pact, which limits EU countries’ budget deficits to a maximum of 3% of GDP. 

But it also insists that the measures must be “timely, targeted and temporary” and limited to two years only (2009-2010).

“The flexibility is that you may have a path of adjustment to come back to 3% which may be, let’s say, rather flexible,” EU officials explained. “In indicating the time path of adjustment, we will take into account the exceptional circumstances of the crisis.”

The Commission also makes clear that its own scope for action is limited. “Most of the economic policy levers, and in particular those which can stimulate consumer demand in the short term, are in the hands of the member states,” the draft plan underlines.

It also stresses the need to ensure “the reversibility of measures” that are likely to increase budget deficits in the short term.

Easing state aid rules

The EU plan will make it easier for member states to offer direct support to companies, providing “a temporary framework of state aid rules to enhance access to finance for business”.

But EU officials said direct support to companies should avoid “negative spillovers” by preventing “some member states or companies [from getting] an unfair competitive advantage compared to others”.

“Avoiding a subsidy race is essential,” EU officials insisted.

Help for car industry 

The Commission plan is also meant to grant assistance to the ailing automobile sector. The recovery plan includes a “smart mix” of regulation, R&D, state aid and funds from the EU and the European Investment Bank (EIB) to trigger future investments into cleaner vehicles.

German Chancellor Angela Merkel and French President Nicolas Sarkozy have vowed to step up aid for ailing European carmakers, especially if the US decides to bail out their American rivals with $25 billion in subsidised loans as demanded by the Democrats. Sarkozy said: “Europe won’t let the car industry down.”

Speaking in Brussels on Tuesday (25 November), European Commission President José Manuel Barroso warned: "We need to support the economy in the short term, but also to reinforce our long term growth potential. That is why we must invest in competitiveness factors for the future, i.e. infrastructures from energy to transport, but also research and innovation, clean technologies to support the transition to the low carbon economy, energy efficiency and of course, education and training."

In a joint letter published in the German daily Frankfurter Allgemeine Zeitung (FAZ) today, French President Nicolas Sarkozy and German Chancellor Angela Merkel asked for more flexibility regarding the Stability and Growth Pact's 3% criteria. Due to "extraordinary conditions", several countries will not be able to meet the current 3% threshold for public debt, the letter reads. Both leaders agreed that political in-fighting about the criteria should be avoided for the sake of resolving the crisis. 

European SME federation UEAPME stressed that Europe's economic recovery would not happen without SMEs. Hence securing SME finance and making the Small Business Act (SBA) a reality would be key in this context, the federation’s President Georg Toifl said. 

But he also warned member states not to go "too far" in their recovery plans, saying industries with clear structural problems or affected by long-term overcapacity must not be bailed out. "Using the economic crisis as a pretext to pour more money on unproductive industries would be the worst possible move at this stage," he concluded.

John Monks, secretary general of the European Trade Union Confederation (ETUC), stressed that it was "time to act on the demand side", urging the use of "all of the different forms of flexibility provided for by the 2005 reform of the Stability Pact".

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.

Last Friday (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).

  • 26 Nov. 2008: European Commission to present economic stimulus package, including loans for the car sector. 
  • 11-12 Dec. 2008: EU summit to decide on scope and details of the package.

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