Wednesday

8th Jul 2020

Commission unveils €200bn stimulus plan

  • The cost of fighting this crisis must not be a worse crisis in the future, said president Barroso (Photo: European Community, 2006)

Warning of the risk of a vicious cycle of recessions crashing upon Europe's shores if nations did not act swiftly, the European Commission on Wednesday called upon the EU's member states to back a €200 billion stimulus package that involves a mix of increased public spending on green initiatives, tax cuts and soft loans for industry.

However, economists worry whether all countries will be able to contribute and whether the amount, which package together stimulus sums already announced by countries such as the UK and Germany will be able to do much.

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Most - around €170 billion - would have to come from national budgets, with the remaining €30 billion split between the EU and the European Investment bank. If backed by member states, the monies, which would be spent over the coming year, represent 1.5 percent of GDP, somewhat higher than earlier plans to produce a €130 billion package.

Explaining the need for such pump-priming measures, President Jose Manuel Barroso told reporters:"Business as usual is not an option. That would lead to a vicious recessionary cycle."

"It would lead to falling purchasing power and falling tax revenues, to rising unemployment and the accompanying human misery, to ever wider budget deficits, ultimately to a risk of social instability," he said. "That is the lesson of the 1930s."

However, the president was clear this was no wholesale return to post-war government intervention and Keynesian economic strategies. This is a temporary measure and governments must come up with detailed plans about how they will pay back any borrowed monies.

"But there is also a lesson from more recent recessions, notably in the 1970s ... short-term spending without structural reform and without a smart strategy for investing and paying back the borrowing can fuel a downward spiral of debt and unemployment in the future."

"The cost of fighting this crisis must not be a worse crisis in the future as we struggle to deal with a hangover of debt."

The measures, which are more guidelines or even spending ideas from the commission and not a detailed architecture of what member states must do, include €5 billion in additional funding for energy infrastructure and high-speed internet connections to those areas in which the market is reluctant to invest.

The commission also proposes €2.1 billion, or just over one percent of the total, on energy-efficient buildings, a "Factories of the Future" initiative that would support new technologies in industry, and encouraging automobile companies to produce "green cars". However, these latter funds are just a redeployment of sums from existing budgets.

Another €500 million would be allocated to supporting trans-European transport networks and another €500 million again for various other projects.

The European Investment Bank will back this with €15.6 billion in new interventions in 2009.

The commission also wants member states to slash VAT on labour-intensive services.

With declining revenues and increased spending, member states' budget deficits would be likely to exceed the three percent of GDP maximum allowed in the Euro zone. In response, the commission insists that this ceiling has not been removed, but it will be more flexible in dealing with such breaches.

Ireland, Germany lukewarm

Meanwhile, the Irish finance department has already said it will not participate in the EU stimulus scheme and Germany is opposed to any cut in sales taxes - at least until after the 2009 German federal elections.

Reacting to the stimulus proposals, German government spokesperson Thomas Steg said on Wednesday: "The chancellor is firmly convinced that tax cuts can only be considered after the federal election in 2009."

Jakob von Weizsacker, a research fellow with the Brussels-based economic Think Tank Bruegel, is worried that some countries might let some states expand their deficits while they themselves resisted any increased spending.

"There is a fundamental difficulty here as every member state has an incentive to free ride," he said. "As many countries as possible should be included in the coordinated effort. Only countries in highly exceptional circumstances like Hungary should be exempted."

Mr von Weizsacker also worried much of the spending would be old wine in new bottles.

"It needs to be ensured that any agreement at the European level leads to additional spending. Otherwise, member states may be tempted to meet their commitments by re-labelling spending that they were planning for 2009 anyway."

Graham Watson, leader of the Liberal grouping in the European Parliament largely welcomed the package, but warned: "We should ... resist unnecessary subsidies for industry. If we want European industry to thrive we need to find ways of boosting green industrial products and consumer spending power as priority."

Conservatives in the house also saluted the plan, with the centre-right EPP-ED grouping saying it would do everything it could to ensure it was passed. Group leader Joseph Daul said however that there should be a quid pro quo in return for the looser purse strings: "We agree with the commission's position that a budgetary stimulus should be provided, but not without structural reforms in the member states who should take measures to boost their economies, without increasing their deficits."

No 'Green New Deal'

Meanwhile greens and the left were sceptical that this was in anyway the Roosevelt-inspired 'Green New Deal' they have been calling for as a solution to the triple finance, energy and climate crisis that would see massive public spending on a shift away from a carbon-based economy.

"The EU Recovery Plan will only work if it makes the economy more equitable and sustainable. This means addressing the real economy and investing in green jobs, but to achieve this the EU should be reversing the Lisbon strategy and reigning in market liberalism, rather than 'reinforcing' it as Barroso suggests," said Myriam Vander Stichele, of SOMO, the Dutch Centre for Research on Multinational Corporations.

"Focussing new investments on the fight against climate change is a good idea, but the commission's claims about are not credible" says Oscar Reyes of eco-watchdog Carbon Trade Watch.

"The European car industry, which stands to gain from a bailout, has a dreadful record in attempting to circumvent environmental regulation at every stage. And channelling significant new climate funds through the European Investment Bank - which has a woeful environmental record - raises series questions about the integrity of the EU's recovery plan."

Across the Atlantic, the incoming Obama administration is scheduled to announce its own stimulus package in the new year. No figures have yet been announced, but the sums expected to be unveiled are between €550 and €800 billion ($700 billlion to around €1 trillion).

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