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Europe

Euro-Zone Leaders Agree Tax Cuts Not a Panacea

The 15 European Union countries that share the euro agreed Monday not to cut value-added tax (VAT), maintaining that such a move would not guarantee a much-needed boost in consumption.

A person handing a euro note to a cashier

Mnisters said they didn't think cutting value-added taxes would convince people to buy more

The idea of temporarily reducing the standard rate of VAT was last week floated by the EU's executive arm, the European Commission, as a means of fighting off the recession that has hit several significant economies in the euro zone.

But at their regular monthly meeting in Brussels, none of the euro zone's finance ministers said they intended to pursue VAT cuts.

"The standard rate of VAT will not be reduced," Luxembourg Prime Minister Jean-Claude Juncker, who acts as the group's powerful chairman, said Monday, Dec. 1.

Juncker, who doubles up as his country's finance minister, said his colleagues had agreed that any non-lasting reduction in VAT would "not guarantee a proper impact on consumption."

"To say that VAT will go down and then put it up shortly after is not going to produce the desired effect," he said.

UK goes it alone

A shopping cart photographed in a supermarket in Karlsruhe, Germany

Products are subject to different tax rates in different European countries

The VAT on goods and services varies within the EU, from 25 percent in Sweden and Denmark to a minimum rate of 15 percent in Cyprus and Luxembourg. Member states can also apply special reduced rates to certain products.

Last week, non-euro member Britain cut its VAT from 17.5 percent to 15 percent until the end of 2009 as part of a massive fiscal and financial package of 20 billion pounds ($30 billion, 23.6 billion euros) intended to stimulate the economy.

The government says the VAT reduction measure would put 12.5 billion pounds in consumers' pockets.

Germany and France had already indicated prior to Monday's meeting that they would not follow Britain's example, noting that their citizens were more likely to keep any savings than spend them.

Rescue package the right step

The finance ministers also used the monthly meet to discuss a 200 billion euro economic rescue package unveiled by the commission last week.

Scrabble letters spell out Rezession on top of a European flag and the dates 2008/2009

Several European nations and institutions have plans to fight off a recession

The plan calls on member states to mobilize 170 billion euros, or 1.2 percent of their gross domestic products (GDP), in extra spending and tax cuts. A further 30 billion euros is to come from the EU's budget as well as from the Luxembourg-based European Investment Bank.

Juncker said finance ministers agreed that the proposals went "in the right direction," but he would not be drawn on whether the combined efforts of individual member states would fulfill the 200 billion euro target.

"We have to wait until all of the national plans are presented. Only then can we do the calculations," Juncker said.

EU debt still a concern

While a number of EU member states have already approved large fiscal stimulus packages, others, like Italy, which sits on Europe's biggest public debt, has so far announced measures totaling just 6 billion euros, or 0.30 percent of its GDP.

Juncker and EU Economic and Monetary Affairs Commissioner Joaquin Almunia dismissed reports that some eurozone members had sought a suspension of the EU's stability and growth pact, which calls on member states to keep their budget deficits to within 3 percent of their GDPs.

The commission has agreed to take a lax approach to countries that break the pact in view of the global economic slowdown, but only if they breach the 3-percent rule by "a few decimal points," and only if such a breach is temporary.

"This means one year, no more," Almunia said.

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