The Wilder View

The irony: EU gets a stimulus package together before the USA

The European Commission will decide on a coordinated fiscal stimulus worth up to $US 164 billion. The sovereing governments would have flexibility in their enactment of the fiscal stimulus – from a cut in value-added tax rates, increased welfare benefits, or perhaps loan aid. It is a fiscal bill for all sizes – S, M and L.

But the kicker is: a multi-country customs union – like the EU – may pass a stimulus package before the U.S.A. does, in December. From Deutsche Welle:

The European Commission plans to unveil a 130 billion euro ($164 billion) stimulus package this week. But countries will have leeway in whether to implement proposed measures such as a cut to value-added tax (VAT) rates.

European countries remain at odds on how to best counter the global financial crisis. In an attempt to bridge the differences of opinion, European Union leaders will put forward a stimulus proposal that gives member countries a set of options for dealing with the crisis, but steers clear of a one-size-fits-all solution.

Details of the European Commission proposal will be released on Wednesday, Nov. 26. Germany said last week that the stimulus plan could be worth 1 percent of the European Union’s gross domestic product (GDP), which would equal 130 billion euros.

The Commission said that the stimulus measures will need to be quick, targeted and temporary. They will be a mix of revenue and spending instruments and will be accompanied by structural reforms, according to a draft viewed by Reuters news agency.

EU wants to coordinate actions “Tomorrow we propose a coordinated EU fiscal stimulus, we will offer guidance to member states on the kind of measures to adopt,” said Economic and Monetary Affairs Commissioner Joaquin Almunia in a speech in Brussels.

The Commission will likely suggest temporary VAT rate cuts, temporary increases in benefits to low-income households and the unemployed as well as temporary extensions of benefit pay-out periods.

It also suggested that governments could offer guarantees and loan subsidies to companies to help them attain credit. The Commission will also propose increasing investments in infrastructure and in key sectors such as cars, construction and green technologies.

While the Commission stopped short of mandating solutions, it wants all fiscal measures to be coordinated at the European level so as to “exploit synergies and avoid negative spillovers,” Almunia said.

Spending up, deficits up One of the biggest sticking points is whether European countries should temporarily cut VAT rates. Current VAT rates on goods and services vary from 25 per cent in Sweden and Denmark to 15 per cent in Cyprus and Luxembourg.

On Monday, Britain became the first European country to announce a VAT cut, with leaders saying it would reduce the VAT by 2.5 percentage points to 15 percent through the end of 2009. The move is aimed at boosting consumer spending. Germany and France ruled out similar VAT rate cuts.

President Nicolas Sarkozy said Tuesday he would unveil an economic stimulus package within the next 10 days to help France’s key sectors resist the global slowdown. Germany announced earlier this month various stimulus measures including tax breaks and infrastructure spending that it says is worth 32 billion euros over two years. Almunia cautioned governments against seeking to spend their way out of the economic slowdown, saying “we need to reduce public debt over the medium term.” T he fiscal stimulus is likely to cause deficits to increase across Europe, and could push countries such as France, Britain, Ireland, Italy, Greece and Portugal well beyond the EU limit of 3 percent of GDP.

Final agreement expected in December The final scope of the proposed program will be decided on Wednesday after Commission President Jose Manuel Barroso has the chance to consult with governments.

“Barroso is currently engaged in shuttle diplomacy between the various capitals to try and reach a consensus before Wednesday on the burden-sharing,” one EU source told Reuters. “It is not just the big states whom he has to satisfy. The smaller and eastern states for example say they cannot afford to pay 1 percent of GDP. So it will not be as simple as just saying 1 percent of GDP.”

EU leaders will formally discuss the proposal at a summit in December.

Originally published at the News N Economics blog and reproduced here with the author’s permission.

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