Page last updated at 22:37 GMT, Tuesday, 25 November 2008

EU eyes uncharacteristic spending spree

By Ben Shore
BBC Europe Business Reporter, Brussels

Euro sign
The EU wants to focus on a coordinated spending spree

Just after noon on Wednesday, Brussels time, the European Commission President Jose Manuel Barroso will call on the 27 member states of the EU to spend, spend, spend.

It is a rather odd situation for the Commission which, as the civil service of the European Union is more often heard handing out sober advice on keeping budgets in check.

But we are living through strange times and the so called "European Recovery Action Plan" is testament to just how strange they are.

The recovery plan is intended to be a coordinated stimulus package, meaning that all the 27 member states of the EU will act at the same time to invest and spend more or - as in the case of the UK - put more money into the hands of citizens through tax cuts.

But the details remain unclear. We are still not exactly sure how much money will be at stake.


Officials believe that by acting as one block, within a small window of time, the combined budgetary expansion of the EU will have more impact than if countries acted in a piecemeal fashion


A figure of 1% of the total economy of the EU has been mooted, which amounts to around 130bn euros (110bn).

That means each member state will be asked to increase their annual budget by 1% of their national GDP. That might be straight forward for a country like Spain which has not been borrowing much money recently, but for Ireland - which has - yet more debt is going to be very unwelcome.

Political pragmatism

But the problems of coordination are not simply financial, they are practical as well.

Take Germany, a country with an enormous, world-leading car manufacturing sector that employs about 20% of its total workforce.

The pressures faced by the industry are currently severe with stricter carbon emission targets in the pipeline and orders for new cars falling dramatically.

Volkswagen factory in Germany
The car-making industry is crucial to the German economy.

Germany will quite naturally see that helping out its motor industry is politically popular and economically sensible. In fact several German politicians have publically supported calls for a 40bn euro, EU-wide, financing package.

But Britain has no comparable industry to make soft loans to, so for the British a temporary cut in VAT, announced on Monday makes a lot of sense.

Taxing issues

A tax cut has the advantage of being applicable immediately, just as the economy is in need of an adrenaline hit and impacts directly on demand: goods will be cheaper so naturally people are more likely to buy them.

The idea in Brussels is that the recovery plan will be a tool box, from which each EU country can choose the methods most suitable for stimulating its own economy

But the Germans and the French have dismissed a Europe-wide version of the British tax cut, arguing that with inflation falling and a recession looming retailers are already cutting prices so there is no need for governments to give up their income.

With such differing opinions it is hard to see how the Commission can coordinate anything at all.

But officials believe that by acting as one block, within a small window of time, the combined budgetary expansion of the EU will have more impact than if countries acted in a piecemeal fashion.

And the commission is going to put its money where its mouth is.

Building bridges

One of the biggest roles of the EU is to part fund infrastructure projects particularly, but not exclusively, in the newer, poorer member states.

Its budget for these projects, which can range from water treatment works to new recycling plants, is 347bn euros up to 2013.

The recovery plan will see a re-organisation of the way so called "structural funds" are paid out. There won't be any more money but what there is will be paid out more quickly and with less strings attached.

The idea in Brussels is that the recovery plan will be a tool box, from which each EU country can choose the methods most suitable for stimulating its own economy.

If that means cutting taxes, fine. If it means helping out the car industry, fine. And if it means giving money to people whose hours are being cut down at work, well, that is fine too.

But the bottom line is that money must be pumped into the system somehow, because without it, the Commission argues, the European downturn will last longer and cut more deeply.

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