More Fiscal Stimulus Planned for Europe

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More Fiscal Stimulus Planned for Europe

Peter Cassata | November 24, 2008

Last week, German Economics Minister Michael Glos said that the EU is planning a massive economic stimulus package to which all member states will be expected to contribute. This was confirmed over the weekend with news that European Commission president José Manuel Barroso will unveil the details of the package Wednesday. The FT reported:

Coordinated national stimulus programs and accelerated spending of regional aid funds are the central elements of a European Union economic recovery plan to be unveiled on Wednesday by EU policymakers.

[Barroso] will set out the case that the EU can kill two birds with one stone by adopting expansionary fiscal policies that not only pull Europe out of its recession but also improve its long-term competitiveness.

Although Commission officials did not mention the size of the plan in their brief to EU governments, German sources claimed it would total €130 ($164) billion, roughly 1 percent of the EU's GDP. Further details also emerged about the proposed package:

[The EU’s fiscal rulebook, the stability and growth pact,] was reformed in 2005 to permit bigger deficits in times of economic distress, and EU policymakers say the Commission will be tolerant of rising deficits next year as long as governments make a firm commitment to balancing their budgets over the medium term – for example, by 2013.
For the EU’s less prosperous member states in central and eastern Europe, and depressed areas in western Europe, the Commission will propose to 'front-load' the distribution of EU regional aid funds. These amount to €347 ($439) billion for 2007-2013, but some money allocated for 2011, 2012, and 2013 would be spent instead in 2009 and 2010. The Commission will also endorse special help for Europe’s car and construction industries.

In the UK, Chancellor of the Exchequer Alistair Darling is expected to announce a further stimulus plan and tax cuts on Monday. According to the IHT:

The British government is expected on Monday to announce a cut in the sales tax as part of a package of measures to stimulate the economy. According to media reports, Brown would temporarily cut the value-added tax by 2.5 points to 15 percent.

Including the cost of various tax breaks, The Sunday Times reported that the government would spend about £16 ($24) billion to keep the economy from slowing further. The Sunday Telegraph put the cost to taxpayers at £15 billion to £20 billion.

In an interview with the BBC, Brown called the measures temporary and tried to relieve concerns that the increased spending would lead to higher taxes later. With the EU's two largest economies already in recession and the U.S. expected to enter its own soon, the global financial crisis marches forward.