The European Commission has unveiled plans for a €200 billion economic recovery plan, equivalent to 1.5% of the EU’s total gross domestic product, a move that it described as an “exceptional response” to a “period of exceptional economic crisis.”
European Commission President José Manuel Barroso said that €170 billion for the stimulus package would come from member states national efforts and €30 billion from the budgets of the EU and the European Investment Bank.
He said that the key principles of the recovery plan, which will be presented to EU finance ministers next week and EU leaders on December 11th and 12th, are that measures at national level should be “targeted, timely and temporary.” EU governments would, for example, temporarily be permitted to run deficits above the 3% of GDP limit set down in the Maastricht treaty.
National governments would be free to decide how they contributed to the overall stimulus package. “The measures member states are introducing should not be identical, but they need to be co-ordinated,” he said.
Barroso said that what the commission was proposing was a “tool box” of possible measures. As different countries are in different economic situations, with some recording strong growth while others suffering from shrinking output, “avoiding one-size-fits-all solutions” is critical, he said.
“Everyone is suffering from the crisis and needs treatment – but not everyone needs the same treatment,” he said. National governments’ contribution to the stimulus plan would depend on their individual economic situation, he said.
Speaking alongside Barroso, Joaquín Almunia, the European commissioner for economic and monetary affairs, pointed out that some member states – such as Poland and Slovakia – were still recording positive growth while in Germany, Italy and France growth was at “a standstill.”
“It would be a complete mistake for the commission to propose a harmonised response while there are different points of departure,” Barroso declared.
The plan recommends a number of actions to stimulate demand, including temporary cuts in VAT and a lowering of taxes on labour to help maintain unemployment.
The Commission plan follows the announcement by a number of EU countries of economic stimulus packages intended to ward off the looming recession and lift consumer demand and business confidence out of their current slump. The German government last week announced a package of tax cuts and spending plans worth €50 billion, or around 0.5% of GDP over two years, and the UK has outlined a €23.5 package of tax cuts worth around 1% of its GDP.
Barroso said that national measures needed to be closely co-ordinated in order to stimulate demand as much as possible. “The full effects of the benefits of this package will only be reached as part of co-ordinated European response,” he said.
The bulk of the stimulus package will be deployed in 2009, Barroso said. On top of the €170 billion stimulus provided by member states’ actions, an extra €14.4 billion would come from the EU’s budget. This money would be made available by advancing €6.3 billion payments for structural and cohesion funds and using €5 billion of unspent funds for priority projects, such as trans-European transport and energy networks and ensuring all EU citizens have broadband internet access by 2010.
Barroso said that the package would enable the EU to match its short-term needs to help citizens and businesses struggling to cope with the effects of the downturn while meeting its longer-term goals of modernising the economy, strengthening competitiveness and promoting low-polluting technologies. “We can re-launch the long-term efforts of EU to make itself a low-carbon and energy-efficient economic for the 21st century,” he said.
The president said that the EU should learn the lessons of recession in the 1970s by ensuring that higher spending did not simply lead to an unsustainable debt burden for future generations. Calling for what he called “smart investment” in future-orientated technologies, he said: “The cost of fighting this crisis must not be a worse crisis in the future.”
The European Investment Bank would increase its lending facility by €15.6 billion for each of the next two years, he said. These funds would be used to help develop greener technologies such as less polluting cars and more energy efficient buildings.
Barroso said that the package would include around €4 billion to speed up the development of cleaner cars. But he stressed that this money was not “old-fashioned industrial plan.” That would, he said, be “counterproductive.” Referring to plans by the US to provide €19.4 billion in cheap loans to its carmakers, Barroso said the measures “appear in complete contradiction with WTO rules,” a reference to the World Trade Organization.
Barroso said that the aim of the package was to combine a short-term boost to demand with meeting the EU’s longer term goals in terms of modernising the economy and strengthening competitiveness. He said that the EU was not abandoning the rules of the Stability and Growth Pact, which aims to ensure countries keep their deficits to no more than 3%. The pact allows rules to be applied flexibly, he said, provided countries’ deficits exceed 3% only by a small amount and only temporarily.
Almunia said that the Commission would continue to use the excessive deficit procedure (EDP) to warn countries if they did not keep their deficits within a few decimal points of 3%.
He gave the example of Ireland, which would face an excessive deficit procedure should its deficit for 2008 reach 5.5% and its deficit for 2009 amount to about 6%, as it is expected to do.