Nov 26, 2008

The Fiscal Stimulus comes to Brussels

The European Union proposes a Euro200bn stimulus to revert the current trend toward recession in 2009. This amounts to 1.5 % of European GDP. How can countries cope with the fiscal stimulus and the European fiscal apparatus, namely the Stability & Growth Pact?

This morning France and Germany called for a relaxation of the 3% deficit ceiling. today Almunia said this will likely be the case: since its reform, the SGP is meant to allow flexibility; although, the commissioner specified that any exception needs to be temporary (the usual bureacratic caveat). Where do the countries stand?

Just a quick look at the numbers from OECD for 2008:


Austria -0.67
Belgium -0.30
Germany -0.45
Spain 0.68
Finland 4.44
France -3.04
United Kingdom -3.75
Greece -2.09
Italy -2.50
Netherlands 1.14
Portugal -2.24

Under the SGP definition, France and the UK are above the ceiling. The current forecasts don't point to negative numbers when talking about GDP growth for 2009, but if the recession is going to be as the average recession in EMU (a GDP slowdown by less than -1.00), then this will imply an average increase in the fiscal deficit by 0.80 in percent of GDP only due to the working of automatic stabilizers (calculations are not reported, but available upon request from the author). This means Portugal, Italy, France and Greece will likely find themselves above the ceiling next year without any government action. I wonder how flexible is going to be the Commission when it comes to the implementation of the "discretionary" intervention, especially toward the more highly indebted countries. Will they suggest to do something timely, targeted and temporary?Or something else?

1 comment:

Sebastian said...

What worries me more than the Comission's complaints is the fact that the fiscal stimulus will lead to increased government debt and given the current situation higher debt serviceing costs even for developed economies. Taxpayers do seem to be smart enough to realize this and I wonder whether the increased spending of the UK (and the tax cuts) will not lead to an near equivalent saving of the people, leaving demand relatively unchanegd and government debt high with the tax burden to be taken up by future generations (i.e. us).
It seems that paying for the excessive retirment systems of former generation was not enough..