Euro group countries agree not to cut VAT to fight recession (Roundup)

Dec 1, 2008, 21:53 GMT

Brussels - The 15 European Union countries that share the euro agreed Monday not to cut value-added tax (VAT), saying such a move would not guarantee a much-needed boost in consumption.

The idea of temporarily reducing the standard rate of VAT was last week floated by the EU's executive arm, the European Commission, as a means of fighting the recession.

But at their regular monthly meeting in Brussels, none of the eurozone's finance ministers said they intended to take up on the offer.

'The standard rate of VAT will not be reduced,' said Luxembourg Prime Minister Jean-Claude Juncker, who acts as the group's powerful chairman.

Juncker, who doubles up as his country's finance minister, said his colleagues had agreed that any non-lasting reduction in VAT would 'not guarantee a proper impact on consumption.'

'To say that VAT will go down and then put it up shortly after is not going to produce the desired effect,' Juncker said.

VAT on goods and services varies within the EU, from 25 per cent in Sweden and Denmark to a minimum rate of 15 per cent in Cyprus and Luxembourg. Member states can also apply special reduced rates on certain products.

Last week, non-euro member Britain cut its VAT from 17.5 per cent to 15 per cent until the end of 2009 as part of a massive fiscal and financial package of 20 billion pounds (30 billion dollars) intended to stimulate the economy. The government says the VAT measure will put 12.5 billion pounds (18.7 billion dollars) in consumers' pockets.

However, Germany and France had already said prior to Monday's meeting that they would not be following the British example, noting that their citizens were more likely to keep any savings than spend them.

In Brussels, eurozone finance ministers were offered a first chance to discuss a 200-billion-euro (251.7-billion-dollar) economic rescue package unveiled by the commission last week.

The plan calls on member states to mobilize 170 billion euros, or 1.2 per cent of their gross domestic products (GDPs), in extra spending and tax cuts. A further 30 billion are to come from the EU budget and from the Luxembourg-based European Investment Bank (EIB).

Juncker said ministers agreed on the fact that the proposals went 'in the right direction', but he would not be drawn on whether the combined efforts of individual member states would fulfil the 200- billion-euro target.

'We have to wait until all of the national plans are presented. Only then can we do the calculations,' Juncker said.

Speaking shortly after his arrival in Brussels, German Finance Minister Peer Steinbrueck had said his country was already doing its fair share and would not be bailing out any other short-cashed member state.

'Germany is putting 31 billion euros (39.5 billion dollars) on the table. That is 1.25 per cent of our gross domestic product. I am not sure everyone has properly registered this,' Steinbrueck said.

Asked whether Germany would be required to do more, EU Economic and Monetary Affairs Commissioner Joaquin Almunia said Germany's efforts were 'appreciated'.

Almunia said he was confident that governments' combined efforts would eventually lead to a total 'very close' to that indicated by the commission. But Juncker cautioned observers against putting too much emphasis on the final figure.

While a number of EU member states have already approved large fiscal stimulus packages, others, like Italy, which sits on Europe's biggest public debt, has so far announced measures totalling just 6 billion euros, or 0.30 per cent of its GDP.

Juncker and Almunia also dismissed reports that some eurozone members had sought a suspension of the EU's stability and growth pact, which calls on member states to keep their budget deficits to within 3 per cent of their GDPs.

The commission has agreed to take a lax approach to countries that break the pact in view of the global economic slowdown, but only if they breach the 3-per-cent rule by 'a few decimal points', and only if such a breach is temporary.

'This means one year, no more,' Almunia said Monday.