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.”