France and Germany fail to agree on EU stimulus

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German Chancellor Angela Merkel and French President Nicolas Sarkozy ruled out joint tax cuts at a meeting yesterday (24 November), underlining Europe’s difficulty in developing a coordinated response to the recession ahead of a recovery plan to be unveiled by the European Commission tomorrow (26 November).

Meeting on Monday (24 November), Merkel and Sarkozy rejected a coordinated cut in value-added tax (VAT) similar to one announced by the UK.

On Monday, UK Chancellor of the Exchequer Alistair Darling announced a VAT reduction of 2.5% (from 17.5% to 15%) as part of a wider stimulus plan which also included higher taxes for the wealthiest section of the population.

However, Merkel and Sarkozy said such measures were unfit for France and Germany. “A general decrease in valued-added tax is perhaps the answer for some countries but for Germany and France, it is not,” Merkel said after the meeting.

But while they agreed on VAT, Sarkozy failed to push the German Chancellor to accept a bigger stimulus plan, coordinated at EU level. Instead, Merkel adopted a wait-and-see approach, saying Germany would review the situation in January. 

She pointed out that the full effects of a €32 billion plan announced earlier this month would have to be assessed before any further measures could be decided upon.

Sarkozy, who has been pushing Germany to do more to kick-start the economy, let his irritation show. Talking about the economic stimulus, he said: “France is working on it, Germany is thinking about it.”

EU recovery plan

The face-off highlighted the difficulties in coordinating economic policies at EU level. On Wednesday (26 November), the European Commission is due to present a “recovery plan”. 

While details of the plan are yet to be unveiled, it is understood that it will include measures to boost investment in clean technologies and greater mobilisation of EU funds in support of Europe’s regions. 

“This plan will include a proposal for a coordinated fiscal stimulus, based on member states taking measures suited to their own economic situations,” according to a statement published on the Commission’s website.

“It will include measures to speed up Europe’s agenda for tackling climate change through investment in energy efficiency and cleaner technologies while at the same time creating jobs that last.”

Last week, Michael Glos, the German economy minister, said the EU package would involve contributions by each member states of about 1% of their Gross Domestic Product (GDP), for a total of €130 billion.

Speaking in the European Parliament last week, Jean-Pierre Jouyet, the French secretary of state for European affairs, specifically mentioned the car sector as an industry that would benefit from the EU-wide stimulus plan. “Targeted and temporary measures to support European producers might be useful, in part to increase technological and ecological performance,” he said.

A decision on the precise nature and amount of the package will be taken by EU heads of states and government during a summit in Brussels on 11-12 December.

BusinessEurope, the European employers' organisation, said in a statement: "We welcome the principle of an EU recovery plan mobilising EU financial resources in support of infrastructure projects, research, innovation and adaptability and enhancing the coordination of national economic policies. The Competitiveness Council must support these measures by accelerating the work on R&D and innovation to strengthen the competitiveness of our economies."

Writing on Eurointelligence, an economic blog, Wolfgang Münchau asks whether Germany is "boycotting a European response" to the recession. "The Franco-German summit went badly, but what do you expect? Angela Merkel seems to relish her role as what the French call 'Madame Non', a reference to Mrs Thatcher in the 1980s."

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 two quarters 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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