European Commission Announces Economic Stimulus Proposal

The European Commission is due to unveil on Wednesday, 26 November, a proposal for how the EU should address the economic crisis financially, including probably a suggestion that Member States contribute about one percent of the bloc's gross domestic product to fund stimulus measures, including for the auto industry.

The EC Commission will call for "a coordinated fiscal stimulus, based on member states taking measures suited to their own economic situations". The package will thus be financed out of the States’ budgets and will have to be within the boundaries of the EU Stability and Growth Pact limiting national budget deficits. However, it will be permitted to use the Pact’s full flexibility, a signal that high deficits will be tolerated in the short term. "Overall, it's about €130 billion that are to be deployed," according to the German Finance Minister, Peer Steinbrueck. This is an amount superior to the EU's annual budget, which is about €110 billion. "Everyone is to fulfill the one percent target," Steinbrueck added. A decision on the precise nature and amount of the package will be determined by EU heads of states and government during a summit in Brussels on 11-12 December.

By contrast, China’s recently announced $586 billion stimulus package is 14 percent of the country’s estimated 2008 GDP. If the United States were to commit to a stimulus package valued at 1 percent of its GDP, it would amount to approximately $138 billion.

The EU stimulus package was discussed at the Franco-German cabinet meeting in Paris on 24 November. The countries’ leaders, however, had difficulties in reaching agreement on several issues. "None of us can entirely foresee the course of the financial crisis, and anyone who acts as though they can are fooling themselves slightly. We will have many joint discussions yet, about thinking as well as about negotiating," German Chancellor Angela Merkel said. Her comments contrasted with those of French President Nicholas Sarkozy, who later on Monday said it was time "to invest massively in infrastructure, in research, in innovation, in education, in training people, because it is now or never."

The calls for financial support of the auto industry have been tempered by the EU Competition Commissioner, Neelie Kroes, who has warned Germany and France against starting a race with the United States to subsidize the car industry. "I ask all governments to avoid the costly trap of a subsidy race," Kroes said in a recent speech. "We have all heard calls, particularly in France, Germany, and the United States, for support to be given to the car industry," she added. "All governments have to resist that."

Subsidies given by the EU States to their car companies first have to be vetted and approved by the EC Commission to ensure that they do not distort competition. Exemptions exist for R&D aid or environment aid, for example, which would have "the double benefit of helping the industry and helping address the problem of climate change," Kroes explained in her speech. Limiting emissions from cars is a central part of the ambitious EU goal of curbing overall CO2 output by a fifth by 2020.

In the United States, the Big Three automakers—General Motors, Ford, and Chrysler—have until 2 December to submit "credible restructuring" plans to the U.S. Congress. Congressional leaders expect the automakers to substantiate how their plans will lead to long-term viability while achieving U.S. fuel efficiency requirements. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid wrote that the plans should demonstrate how the American auto industry can "become a long-term global leader in the production of energy-efficient advanced technology vehicles." In addition to that, automakers’ plans must include limits on dividends and executive compensation as well as proposals for resolving their significant healthcare and pension obligations. While both the U.S. Congress and President-elect Obama want to offer federal support to the auto industry, the automakers must produce credible restructuring plans in short order. If the plans are not up to par, what then? It is hard to imagine how, in a few short weeks, the industry will be able to develop solutions to problems that have plagued them for many years. The subsidy race may be more of a crawl.


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