Wednesday, 26 November 2008

The EU's economic stimulus package - will it work?

With the worsening economic and financial crisis the EU finally published its response today with its European economic recovery plan. I've not yet had the chance to go through all the details of what the Commission is proposing but its clear that this is not a one size fits all- it couldn't possibly be given the differences between Member States in terms of their budgetary and economic situations and outlook and their exposure to the current economic and financial crisis.

Top line is the fiscal stimulus of 200 billion euro (1.5% EU GDP). Most of the money will come from national budgets, with EU Member States asked to contribute 170 billion euro (1.2% of EU's GDP). The rest -around 30 billion euro or 0.3% of EU GDP would come from the EU's own budget and the European Investment Bank.

The recovery plan is based on short-term measures to boost demand, protect jobs and restore consumer and business confidence. It aims to drive a coordinated EU response to the economic crisis and builds on the coordinated EU response to the financial crisis.

The Recovery Plan combines coordinated national action with a number of EU policy measures that have already been adopted by some national governments. There are 10 priority initiative measures:
(1) increased support for the unemployed and the poorest households, which have been hit hardest by the economic slowdown, by launching an employment support initiative through the European Social Fund and the Globalisation Adjustment Fund, increasing efforts to develop skills.
(2) Creating demand for labour by adopting temporary VAT cuts across the whole economy and lowering taxes on labour, in particular VAT on 'labour-intensive' sectors such as hairdressers and restaurants. There are also suggestions for reduced social charges on lower incomes to promote the employability of lower skilled workers but since taxation is a matter for member states the Commission makes it clear that it is up to Member States to decide whether or not they wish to take up any of these suggestions.
3) Improving access to finance for business (e.g. the European Investment Bank has already significantly increased its loans of 30 billion euro to SMEs and the Commission is planning a simplification package to speed up its decision-making on state aid, as well as temporarily, giving member states greater room for manoeuvre in granting companies loans)
4) Reducing administrative burdens and promoting entrepreneurship (including by removing the requirement on micro-enterprises to prepare annual accounts, facilitating access to public contracts and ensuring that public authorities pay invoices within one month);
5) Increasing investment to modernise Europe's infrastructure (in particular, an additional 5 billion euro in funding for trans-European energy interconnections and networks and broadband infrastructure projects, as well as the launch of a 500 million euro call for proposals for trans-European transport (TEN-T) projects)
6) Improving energy efficiency in buildings;
7) Promoting the rapid take up of “green products” (the Commission will propose reduced VAT rates for green products and services, related in particular to the building sector)
8) Increasing investment in R&D, innovation and education;
9) Developing clean technologies for cars and construction (through public-private partnerships for green cars - with total funding of at least €5 billion - energy efficient buildings - the estimated funding for this partnership is €1 billion - and “factories of the future” - with funding of €1.2 billion); and
10) Developing high speed internet for all.

Member States are also to be given greater flexibility in managing their budget deficits with the temporary relaxation of the stability and growth pact's 3% of GDP ceiling on budget deficits. The pact is supposed to ensure fiscal discipline is maintained and enforced across the eurozone and non-eurozone countries. But key to this economic recovery plan is that it is very much an attempt by the EU to get Member States to coordinate the various actions they are taking to combat the economic downturn and stimulate the EU economy. Ensuring there is a coordinated European response is all pretty much what the Commission can do given that most of the policy levers for dealing with the economic and financial crisis remain the competence of national governments.

The plan is a step in the right direction. Indeed, many of the EU policy measures suggested will be of benefit to Scotland and I will be interested to see further details about this additional 5 billion euro for funding energy and broadband infrastructure. However, first we have to see the reaction of EU finance ministers, then the EU leaders when they meet in Brussels on 11-12 December. Then we will have to how it will be implemented by the Member States and the extent to which it can help Europe's economies get back on track in terms of long-term growth and ensure Europe retains its competitiveness vis-a-vis the rest of the world.

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