$260b stimulus package proposed for EU

The European Commission (EC) yesterday called for a European Union-wide fiscal stimulus package of 200 billion euros ($259 billion) to stave off looming recession in the 27-nation bloc.

The proposal comes just a day after the US unveiled two new plans that will provide $800 billion to try to help unfreeze the market for consumer debt, from home mortgages to credit cards.

The EC proposal is an attempt to bridge policy differences among European Union (EU) countries on how to react to the worst financial crisis since the Great Depression. But some are worried that a dash for growth will inflate national deficits at precisely the wrong time.

EU leaders will study the plan at a Dec 11-12 summit, and EC President Jose Manuel Barroso stressed that national governments should regard the scheme as offering them options rather than strict policy diktats.

"Our approach is to offer a toolbox," Barroso told a news conference of a package of proposals worth 1.5 percent of the bloc's GDP, including sales tax cuts and funds to needy sectors such as the auto industry. "Measures that member states are introducing should not be identical, but they need to be coordinated."

France, Britain and several other EU states have already embarked on national efforts to boost their economies. "Measures already announced by member states, of course they are part of this effort," Barroso said.

It is unclear whether the scheme - more ambitious than a package worth just 1 percent of GDP that had originally been mooted - would be sufficient, he said. But economists voiced skepticism about how the plan would be managed.

Christoph Weil, of Commerzbank, said: "The real steps that national governments will take are an open question - it will be different from country to country."

Germany has already said it would resist any attempt to coordinate cuts in sales or value-added tax across the EU, while east European states such as Poland do not want to increase their deficits because they need to show budget discipline to adopt the euro currency.

The proposals comprise measures worth 1.2 percentage points of national budget spending and 0.3 points of EU funding.

They call for states to cut value added tax for labor-intensive services and include plans for at least 5 billion euros of extra funding to encourage the auto industry to develop more environmentally-friendly cars.

But German Chancellor Angela Merkel warned against EU states engaging in a competition to produce big stimulus packages for their economies. "We should not get into a race for billions," Merkel told the Bundestag lower house of parliament.

The stimulus, along with the fall in revenue and rise in spending that accompany an economic slowdown, is likely to lift deficits in France, Britain, Ireland, Italy, Greece and Portugal to well beyond the EU ceiling of 3 percent of GDP.

EU Economic Affairs Commissioner Joaquin Almunia said temporary breaches would be acceptable as long as states remained close to the upper limit.

Questions:

1. What are some people worried about with this plan?

2. Why don’t east European states want to increase their deficits?

3. How far is the stimulus likely to lift deficits by?

Answers:

1. That a dash for growth will inflate national deficits at the wrong time.

2. Because they need to show budget discipline to adopt the euro currency.

3. In France, Britain, Ireland, Italy, Greece and Portugal: to well beyond 3 percent of GDP.