Financial Reform Watch

EU Reaches Agreement on Economic Stimulus and Climate Commitments

The EU leaders’ meeting on 12 December delivered results on all the main agenda items, including the stimulus package to counter the economic recession and the energy/climate legislative package intended to substantially reduce carbon dioxide (CO2) emissions and demonstrate global leadership.

The European Economic Recovery Plan, described by many observers as not aggressive enough, provides a framework for action to be taken at the EU level as well as for measures adopted by each Member State, taking account of their individual circumstances. It is based on an effort equivalent in total to approximately 1.5 percent of the EU’s gross domestic product (GDP) and also envisages the initiation of priority action to enable the EU economies to adjust more rapidly to current challenges.

The Plan will thus largely be implemented by the individual Member States according to national preferences, which may render it less effective than if the states were to work in total concert. The appetite and capacity for fiscal stimulus at this point in time varies among EU countries, with, for instance, Germany dragging its feet and going against the views of many economists, including this year’s winner of the Nobel Prize in Economics, Paul Krugman. Some reports say that Italy’s stimulus plan actually is negative because it includes more tax hikes than measures to stimulate the economy.

Despite the variety in approaches to implementing the EU’s goals—the usual EU-mosaic approach—the leaders did agree to certain guidelines, including:

1.  Measures to support demand must aim to

  • produce immediate effects;
  • be of limited duration; and
  • be targeted at the sectors most affected and most structurally significant to the economy (e.g. the automotive industry and the construction sector).

2.  Depending on national circumstances, stimulus measures may take the form of

  • increased public spending
  • judicious reductions in tax burdens
  • a reduction in social security contributions, and
  • aid for certain enterprise categories or direct aid to households, especially those most vulnerable.

The agreed climate package, albeit not directly related to the financial crisis, will have a significant impact on the EU economy going forward, affecting areas of public spending and fiscal policy. This package will implement the EU’s energy and climate commitments, especially the target of a 20 percent reduction in greenhouse gas emissions by 2020.

Last week’s EU meeting marked the end of the French EU Presidency, which is widely considered a great success. Expectations concerning the upcoming term of the Czech Republic’s President Vaclav Klaus are muted while the challenges facing the EU show no sign of abating.

The hopes in the EU for a revitalized relationship with the United States came across when the UK Prime Minister commented on the EU meeting. These comments are widely shared in the EU with expectations being raised exponentially as the highly qualified members of President-elect Obama’s different policy teams have been made public.

"When next month a new President takes office in America, also committed to fiscal action to cope with the economic slowdown, we will be able to work together and show that Europe and America can make changes that will benefit the economy. The economic slowdown, as everybody knows, is a global problem that requires global action, and that is why in Europe and America we are united in our belief that governments have a duty to act. We will continue to reject the do nothing approach. We will not stand by and let the recession take its course. What Europe has proved unanimously today is it is ready to act in a united way to deal with the global downturn and to do so in an ambitious and coordinated manner."

As most are aware, the United States will be dealing with its own stimulus package early in the New Year. Many believe that Congress will begin debating a package the second week of January and have it ready for President-elect Obama to sign after he is sworn in on January 20th. This would be a very aggressive timeline, but during a time of need and crisis anything can happen.

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