EU stimulus package meets with skepticism

The new fiscal stimulus proposed by the European Union last week, valued at roughly €200 billion (Kč 4.96 trillion) or 1.5 percent of the EU gross domestic product (GDP), was met with scepticism by economists.
           
The package is higher than the €130 billion initially talked about. The move came one day after the U. S. FederalReservepledgedupto$800billion (Kč 15.4trillion) to help homebuyers’ and small businesses in an effort to raise economic confidence.
           
The proposal, aimed at coordinating efforts between member states across the EU bloc in an attempt to counteract effects of the economic downturn, combines several measures: a redirection or accelerated spending of certain EU funds; plus a legal framework in which member states can take taxation and investment measures they believe are appropriate to their own situations. Individual measures suggested range from accelerated distribution of certain EU aid funds, such as regional assistance, to targeted tax incentives for energy-efficiency program sand backing for lower payroll taxes and employer contributions. Up to €170 billion will be put at stake by member states, with the EU spending contribution reaching a total of€30billion. In Europe, countries such as the UK have already launched an L20billion fiscal stimulus program, while France has been promising to unveil a “massive” package at the beginning of December, expected to be worth around €19 billion according to UK-based international economic daily Financial Times.
           
Despite the apparent good news, worries amount that the package spending, if approved, might increase government deficits in countries such as France, Italy, Greece and Portugal. Even if an increase in the public deficit above the Maastricht criterion of 3 percent is allowed in exceptional situations, the European Commission is still set to oversee an eventual slide across the board of deficits in key EU economies.
           
Critics of the initiative pointed out that the package won’t be fully effective, as it isn’t aimed at concrete and immediate measures.
           
The Commission forecasts of growth in 2009vary fromaround4percent in Central European states such as Slovakia and Poland, to negative figures in the UK, Ireland, Spain and Estonia.
           
On the other hand, some macroeconomic experts consider the government intervention to be helpful. International banks are expected to release their grip on credits starting the second quarter of 2009, according to Daniel Cappelletti, partner in transaction services with international consultancy PwC Česká republika in Prague (see the Story, page 22). FT noted that there is indeed a consensus among many economists and at institutions such as the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) that additional fiscal stimulus plans are urgently needed. On the other hand, one of the major risks economists foresee for the next year is an irrational increase in public spending. “There is a risk the weak governments, both Czech and others might be lured to spend more of the public money to help the economy. This might theoretically lead toward an excessive state budget gap,” said Markéta Šichtařová, general manager with brokerage Next Finance.
           
While economists’ opinions on the efficiency of such government interventions vary, it is still unclear how and if the package will be reflected in measures taken by the Czech government. In any case, a revamping EU economy could only bring hope for the Czech exporters and help the country achieve its above 3 percent GDP growth rate hope for 2009. The EU stimulus package is set to be discussed at the next EU summit in Brussels Dec.11–12.