EU calls for 200 billion-euro stimulus plan
European Commission chief: ‘Exceptional times call for exceptional measures.’
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 arm, European Commission chief Jose Manuel Barroso. "Our plan will boost demand and thus save and create millions of jobs."
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 percent of the bloc's gross domestic product.
"(That number of) 1.5 percent 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 competitiveness in key sectors," Simon Tilford, chief economist at the London-based Centre for European Reform told 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 percent 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 labor 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 percent to 15 percent 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 5 billion euros in cheap loans to help Europe's struggling carmakers produce cars that do less damage to the environment. The amount is just over one-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, 1.2 percent 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 Dec. 11-12.
Setting the tone for what could turn out to be an acrimonious discussion in Brussels, German deputy government spokesman Thomas Steg said Berlin would not approve additional funding to finance the EU stimulus package.
Germany, which fears having to foot much of the bill, had previously indicated that 130 billion euros would be sufficient to get the EU economy back on track.
Germany holds "a strongly divergent" view to the commission's proposals on the issue, Steg said.