On 26 November the European Commission launched the so expected Recovery Plan for growth and jobs planning to drive a coordinated EU response to the economic crisis. The key principles of the recovery plan are that measures at national level should be “targeted, timely and temporary.” The Recovery Plan calls for a co-ordinated fiscal stimulus of €200 billion equivalent to 1.5% of the EU´s GDP. Around €170 billion (1.2% of GDP) would come from Member States national budgets and €30 billion (0.3% of GDP) would come from the EU budget and from the European Investment Bank.
There are serious concerns that the Commission’s Recovery Plan package may leave Member States with huge budgets deficits and elevated national debt.
On 2 December the Ecofin Council debated the recovery plan presented by the European Commission. According to the Council Conclusions the finance ministers welcomed the Commission’s Plan but only “in principle.” Joaquín Almunia, the European commissioner for economic and monetary affairs, said, that there was a “positive reaction” to the €200 billion but “not a total consensus.” Not all Member States are willing to commit to the Commission’s proposal. France and the United Kingdom were among the countries which favour a very ambitious recovery plan. Germany has been the main critical of the Commission’s Recovery Plan as it has been unwilling to promise additional financial injections beyond what it has already domestically planned.
On 12 December, the European Council has endorsed the Commission’s Economic Recovery Plan. It stressed that “The plan will provide a coherent framework for action to be taken at the level of the Union as well as for measures adopted by each Member State, taking account of their individual circumstances.” Gordon Brown has said “Every country recognises that they have got to take action in a co-ordinated way and to a large extent – which is 1.5% of GDP.”
The EU leaders have approved the €200 billion European economic recovery plan proposed by the European Commission, but differences remain over the tools and the level of public spending. There are still deep differences over how best to respond to the current economic downturn. According to Czech Prime Minister Mirek Topolánek “if the proposal were binding, it's clear it wouldn't be adopted.”
The Commission has suggested tax cuts such as reduced social charges on lower incomes. The Commission has urged the Council to adopt the proposed Directive to make permanent reduced VAT for labour-intensive services for sectors such as hairdressers and restaurants.
The European Council has stressed that Member States have already taken several measures, “in response to their specific circumstances and reflecting their different scope for action.” However, the EU leaders believe that “An increased, coordinated effort is required, given the scale of the crisis (…).” The EU leaders have stressed that measures to support demand may include increased public spending, tax cuts, a reduction in social security contributions, aid for certain categories of companies or direct aid to poorest households.
There are no specific decisions on concrete measures to be included in the national stimulus proposals. It should be recalled that the fifteen eurozone Member States have declared that they would not reduce their VAT rates to the minimum EU threshold of 15%. They refused, therefore, to follow the UK steps.
As regards proposals to lower taxes on labour-intensive local services, the Ecofin Council has not reached an agreement on amending the VAT Directive on reduced rates. The European Council has stressed that it should be possible for the Member States that so wish, of applying reduced VAT rates in certain sectors. It has requested the ECOFIN Council to settle this issue by March 2009. Sarkozy claimed that he got support to cut VAT on labour-intensive services. Moreover, he said “I had full assurances from the chancellor [Angela Merkel] that she will give instructions in a constructive spirit to her finance minister to deal with this matter.”
The EU leaders have also agreed on the simplification of procedures and faster implementation of programmes financed by the Cohesion Fund, Structural Funds aiming at strengthening investment in infrastructure and in energy efficiency as proposed by the Commission. The EU leaders also supported rapid additional action by the European Social Fund to support employment and the improvement and speeding up the European Globalisation Adjustment Fund.
The Commission’s plan also covers infrastructure investments in several ways, such as: allocating €5 billion euros to trans-European energy inter-connections and broadband infrastructure projects and by launching a €500 million call for proposals for trans-European transport projects. The Commission has also proposed a combined funding of €5 billion for the "European green cars initiative" which is a research partnership between public and private sectors on smart infrastructures and technologies for using renewable and non-polluting energy sources for cars.
From the €200 billion set out by the recovery plan, €30 billion will come from Community funds and the European Investment Bank whereas €170 billion will come from Member States’ budgets. From the €30 billion, €14.4 billion will come from the EU budget. This money is not fresh but it will be gathered through the use of unspent money, redeployments and advance payments.
€5 billion to fund trans-European energy interconnection and broadband internet projects will come from money unspent in 2009 and 2010. However, an agreement by qualified majority in the Council with the European Parliament is needed to reopen the interinstitutional agreement on the 2007-2013 institutional framework to allow the use of the unspent money over these two years. In fact, on 10 December the Commission has adopted a draft Decision amending that Interinstitutional Agreement. The Commission has proposed to use part of the financial margins available in the EU budget under agriculture for 2008 and 2009 and shifts them to the budget heading for Competitiveness for Growth and Employment in 2009 and 2010. Several Member States believe that unused money should be given back to the member states. Moreover, they are concerned with the lack of indications from the Commission on which projects the money will be spend.
€6.3 billion for advanced social and cohesion fund payments will be gathered through taking forward payments from Structural Funds in 2009 (including €1.8 billion from the Social Fund). Moreover, around €3.1 billion will be made available through redeployments under the different headings. €2.1 billion will be redeployed from existing budgets for green cars, energy efficient buildings and factories of the future and high-speed internet. There are also €0.5 billion of the advanced payment from the fund for the trans-European network as well as €0.5 billion for various other projects.
The Commission has called for the EU Member States to increase spending but they are still required to respect the EU's fiscal rules. The Commission will continue to use excessive deficit procedure (EDP) if the 3% of GDP deficit threshold is breached unless the excess was “close and temporary”. Joaquín Almunia, the EU economic affairs commissioner, said: “Close means a few decimals, not many decimals.” The European Council has acknowledged that the Recovery Plan measures “will temporarily deepen the deficits.”
The European Council has reaffirmed its commitment to sustainable public finances and called on the Member States to “return as soon as possible, in accordance with the Pact and keeping pace with economic recovery, to their medium-term budgetary targets.”
The majority of the measures proposed would be implemented in 2009, whereas some measures would continue into 2010.
