EU finance minister water down recovery plan, no VAT cuts (Roundup)

By Nicholas Rigillo Dec 2, 2008, 15:26 GMT

Brussels - The European Union's finance ministers Tuesday offered their mixed blessing to a set of measures aimed at helping the bloc weather a financial crisis and recession double whammy.

The European Commission's economic recovery plan was watered down, with ministers striking out a reference to its headline figure of 200 billion euros (252 billion dollars) in a text due to be agreed next week by heads of state and government.

And despite calls for a better coordination of economic policies, Britain was left isolated in its effort to boost consumption through cuts in the standard rate of value-added tax (VAT), with none of the other 26 member states indicating that they would be following its lead.

The opportunity of reducing the standard VAT rate on goods and services to a minimum level of 15 per cent for a limited period was tabled by the European Commission last week as part of its 200- billion-euro (252-billion-dollar) recovery plan.

Current VAT levels vary widely across the EU - from 25 per cent in Sweden and Denmark to 15 per cent in Luxembourg and Cyprus. Member states can also apply special reduced rates on certain products.

Britain has already cut its standard rate, from 17.5 per cent to 15 per cent until the end of 2009. But the rest of the EU has expressed scepticism over the move, with Luxembourg Prime Minister Jean-Claude Juncker noting late Monday that eurozone ministers felt that non-lasting reductions in VAT would 'not guarantee a proper impact on consumption.'

Finance ministers also failed once more to agree on an old plan to introduce permanent VAT cuts for labour-intensive businesses such as restaurants and hairdressers.

'We agreed to disagree,' said French Finance Minister Christine Lagarde, whose country holds the rotating presidency of the EU until the end of the year.

However, Lagarde insisted that ministers had nevertheless achieved an 'unimaginable' level of agreement on a variety of other issues, saying the financial crisis had acted as a catalyst for decision- making.

At their final regular meeting of the year, ministers gave their broad backing to the commission's economic recover plan.

This calls on EU governments to help mobilize the equivalent of 1.5 per cent of the bloc's overall gross domestic product, with some 30 billion euros in investments coming from the EU budget and from the Luxembourg-based European Investment Bank (EIB).

But while the 1.5 per cent target was confirmed, a reference to the remaining 170 billion euros coming from member states was scrapped, meaning the exact composition of the total size of the package remains unclear.

On Monday, German Finance Minister Peer Steinbrueck had said Germany was already doing its share by placing 31 billion euros - or 1.25 per cent of the country's GDP - in the hands of consumers.

But countries with big budget deficits such as Italy, which sits on Europe's biggest public debt mountain, has so far announced measures totalling just 6 billion euros, or 0.30 per cent of its GDP.

Moreover, ministers rejected an offer by the commission to invest 5 billion euros of unspent community funds in helping improve internet broadband and energy interconnections.

There were also mixed results in the battle to restore confidence in the wake of the global credit crunch.

As expected, ministers formally agreed to raise the minimum level of bank deposit guarantees for their citizens, from 20,000 euros (25,000 dollars) to 100,000 euros by the end of 2011.

And they also endorsed plans to limit inter-bank exposures and to force banks to set aside a certain percentage of capital against their loans.

But efforts to strengthen the supervision of large insurance groups ran into trouble and will now be the topic of heated discussion in the European Parliament.

Meanwhile, ministers sanctioned a capital increase for the EIB of around 65 billion euros, to around 230 billion euros. The EIB, which is the EU's long-term lending bank, will use some of the extra money to finance efforts by the European car industry to develop greener vehicles.

Officials also raised the total amount of money available to member states which experience balance-of-payments problems as a result of the financial crisis - from 12 billion euros (15 billion dollars) to 25 billion euros.

Hungary has already received EU loans worth 6.5 billion euros, while Latvia has also applied for help.