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Europe hopes to counter the global financial downturnImage: Bilderbox

European Rescue

DW staff (th)
November 26, 2008

The European Commission has announced a new 200 billion euro ($259 billion) stimulus package aimed at steering the bloc out of a recession.


European officials announced a two-year stimulus campaign on Wednesday, Nov. 26 aimed at jolting European Union economies out of a recession. The European Commission said it wanted 200 billion euros of extra spending and tax cuts over the next two years.

"Exceptional times call for exceptional measures," European Commission President Jose Manuel Barroso said as the details of the plan were announced.

The plan would represent 1.5 percent of the EU's gross domestic product (GDP). Around 170 billion euros needed to finance the plan would come from national governments and the rest from EU funds and the European Investment Bank.

The European plan follows a US Federal Reserve announcement on Tuesday that it would spend up to $600 billion to purchase mortgage securities and $200 billion for asset-backed securities to help get credit to consumers. That money is in addition to the $700 billion rescue package already approved by Congress.

Three women with shopping bags
Would a tax cut get Europeans spending again?Image: picture-alliance / Chad Ehlers

In an attempt to bridge the differences of opinion, EU leaders put forward a proposal that gives member countries a set of options for dealing with the crisis, but steers clear of a one-size-fits-all solution.

The Commission said that the stimulus measures will need to be quick, targeted and temporary. They will be a mix of revenue and spending instruments and will be accompanied by structural reforms.

EU leaders will formally vote on the proposal at a summit in December.

"I expect this package to receive strong support from European governments," Barroso said.

EU wants to coordinate actions

The Commission suggested that member countries consider temporary VAT rate cuts, temporary increases in benefits to low-income households and the unemployed as well as temporary extensions of benefit pay-out periods.

It also suggested that governments could offer guarantees and loan subsidies to companies to help them attain credit. The proposal also looks at increasing investments in infrastructure and in key sectors such as the automobile sector -- where an additional five billion euros in extra funding is planned.

While the Commission stopped short of mandating solutions, it wants all fiscal measures to be coordinated at the European level so as to "exploit synergies and avoid negative spillovers," Economic and Monetary Affairs Commissioner Joaquin Almunia Tuesday in a speech in Brussels.

Spending up, deficits up

One of the biggest points of disagreement is whether European countries should temporarily cut VAT rates. Current VAT rates on goods and services vary from 25 percent in Sweden and Denmark to 15 percent in Cyprus and Luxembourg.

French president Nicholas Sarkozy, left, and German Chancellor Angela Merkel, right
France and Germany have come out against a VAT cutImage: AP

On Monday, Britain became the first European country to announce a VAT cut, with leaders saying it would reduce the VAT by 2.5 percentage points to 15 percent through the end of 2009. The move is aimed at boosting consumer spending. Germany and France ruled out similar VAT rate cuts.

President Nicolas Sarkozy said Tuesday he would unveil an economic stimulus package within the next 10 days to help France's key sectors resist the global slowdown. Germany announced earlier this month various stimulus measures including tax breaks and infrastructure spending that it says is worth 32 billion euros over two years.

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