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Europe

Brussels Gives Members' VAT Reduction Plans the Green Light

The European Commission is to allow member states to reduce their value added tax (VAT) rates to boost consumption during the recession, officials in Brussels said Tuesday, Nov 25.

Graphic of euro bills and EU flag

A number of EU states are considering VAT cuts while others are against them

The European Union's executive arm will also propose increasing investments in infrastructure and in key sectors such as cars, construction and green technologies as part of its economic stimulus package, due to be unveiled on Wednesday.

"Tomorrow we propose a coordinated EU fiscal stimulus, we will offer guidance to member states on the kind of measures to adopt," said Economic and Monetary Affairs Commissioner Joaquin Almunia Tuesday in a speech in Brussels.

Officials told the DPA news agency this means giving governments a free hand in reducing their VAT rates -- but only as long as these cuts are temporary and that the standard rate is kept above the bloc's minimum level of 15 percent.

Current VAT rates on goods and services vary from 25 percent in Sweden and Denmark to 15 percent in Cyprus and Luxembourg. Member states can also apply reduced rates on certain products.

British VAT cut leads the way

Britain's Chancellor of the Exchequer Alistair Darling with Britain's Prime Minister Gordon Brown

Britain's Chancellor Alistair Darling takes the credit

The decision follows a move by the British government, which on Monday announced that it would next month cut the country's VAT on consumer goods from 17.5 percent to 15 percent until the end of 2009.

The VAT measure, which is estimated to put 12.5 billion pounds ($18.75 billion) in consumers' pockets, is part of a massive fiscal and financial package of 20 billion pounds to stimulate the economy in the face of a looming recession.

The European Commission wants any fiscal measures to be coordinated at European level so as to "exploit synergies and avoid negative spillovers," Almunia said.

The commission also wants to mobilize resources in favour of troubled sectors such as the car industry, which has asked for 40 billion euros ($51 billion) in cheap loans to help it meet the EU's latest environmental standards.

However, with no new EU money being promised, the amount of funds available from Brussels is likely to be limited.

EU: Funds must be efficiently used

Euro coins on the euro flag

Existing EU funds must be better managed

Instead, officials are expected to call for a more efficient use of resources, such as the existing 500-million-euro globalization fund, which is aimed at retraining workers who have lost their jobs to non-EU countries, and the 11-billion-euro European social fund, which is aimed at boosting employment more generally.

They are also expected to call for a more rapid and effective use of the EU's massive "cohesion" budget, which is designed to bring the standard of living in its poorest areas up to Western levels, and which is set to cost 347 billion euros between 2007 and 2013.

The EU executive will also urge EU member states to push for more economic reform and modernization in areas from energy efficiency to research and development and waste management -- sectors long highlighted as the key to making Europe's economy more competitive.

At the same time, Almunia has cautioned governments against seeking to spend their way out of the economic slowdown, saying "we need to reduce public debt over the medium term."

Dark times ahead for recession-hit bloc

Commission figures out earlier this month showed that the 15- member eurozone has officially slumped into recession. The prospects for 2009 remain gloomy.

Among the worst-performing EU economies are those of Britain, Germany, Ireland, Spain, and Italy.

New member states Latvia and Hungary, meanwhile, have had to resort to outside help to recover from the global credit crunch.

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