EU calls for 200 billion-euro economic stimulus plan (Roundup)

By Nicholas Rigillo Nov 26, 2008, 14:12 GMT

Brussels - The European Union on Wednesday called on member states to help the bloc avoid a deep recession by mobilizing 200 billion euros (260 billion dollars) in extra spending and tax cuts.

'Exceptional times call for exceptional measures,' said the head of the EU's executive, European Commission chief Jose Manuel Barroso.

According to Barroso, the bulk of the money - 170 billion euros - should come from national governments, with the remaining 30 billion being made available by the European Commission and the Luxembourg- based European Investment Bank (EIB).

By combining national initiatives and EU funds, the European Economic Recovery Plan should amount to about 1.5 per cent of the bloc's gross domestic product.

'(The figure of) 1.5 per cent is a significant amount, but most will be distributed at the national level, and the question is how much will qualify as genuine stimulus and how much will be devoted to shoring up competitivity in key sectors,' Simon Tilford, chief economist at the London-based Centre for European Reform told Deutsche Presse-Agentur dpa.

The EU plan aims to boost demand, save jobs and help restore confidence in the aftermath of the global credit crunch, which analysts say has pushed the world's biggest economic bloc into a prolonged downturn, with unemployment predicted to rise by 2.7 million over the next two years.

In its communication, the commission says governments should coordinate their responses in order to 'swiftly stimulate demand and boost consumer confidence', safeguard the most vulnerable members of society and help transform the EU into a low-carbon economy.

Because the envisaged extra spending and tax cuts will inevitably lead to higher budget deficits, officials in Brussels say the strict rules governing the EU's Stability and Growth Pact will be applied 'judiciously'.

The guardian of the pact, Economic and Monetary Affairs Commissioner Joaquin Almunia, explained that his office would apply 'flexibility' when deciding whether to sanction countries that exceed the 3 per cent of GDP upper limit by only a few decimal points.

At the same time, Barroso and Almunia rejected calls for the pact to be changed, saying any such move risked undermining confidence in the EU's common currency, the euro.

According to the plan outlined on Wednesday, governments are encouraged to improve their countries' competitiveness by lowering labour taxes and boost private consumption through temporary cuts in value added tax (VAT).

This follows a move by the British government, which on Monday announced that it would cut the country's VAT on consumer goods from 17.5 per cent to 15 per cent until the end of 2009, as part of its own 20-billion-pound (30-billion-dollar) fiscal stimulus package.

However, the EU's two largest economies - Germany and France - have already indicated that they will not follow the British example.

Meanwhile, the EIB is to mobilize 30 billion euros in loans for small- and medium-sized companies and the commission is to spend 5 billion euros on linking national energy grids and promoting broadband communication networks.

The EIB will also provide 4 billion euros in cheap loans to help Europe's struggling carmakers produce cars that do less damage to the environment. The sum is only a tenth of what the European Automobile Manufacturers' Association had been asking for.

Governments, for their part, should focus their investments on new infrastructure, on improving energy efficiency and on reducing pollution.

The plan does not create a common EU recovery fund, meaning any money made available by member states will be spent domestically.

And while Germany has already said it will do its share by mobilizing 32 billion euros, or 1.2 per cent of its GDP, it remains unclear how some of the EU's less well-off nations will benefit.

Latvia and Hungary, for instance, have both had to resort to outside help in dealing with the global credit crunch.

The plan now has to be approved by EU leaders meeting for a summit in Brussels on December 11-12.