By Meera Louis and Fergal O’Brien
Nov. 26 (Bloomberg) -- The European Union is coordinating a 200 billion-euro ($259 billion) stimulus package for the 27- nation economy and said more may be needed to limit the impact of the global financial crisis.
The package, to which individual countries will contribute 170 billion euros, is equivalent to 1.5 percent of the 27-nation EU’s gross domestic product. “We may even need more,” European Commission President Jose Barroso said in unveiling the proposal in Brussels today, adding that the plan was an “exceptional response” to an “exceptional crisis.”
Today’s proposal is the latest in a series of measures to limit the impact of a worldwide financial turmoil that has shut down access to funding, roiled stock markets and sent household and corporate confidence into a tailspin. The EU wants to coordinate measures among member countries to boost growth after the economy slipped into a recession in the third quarter.
Europe’s largest nations already have begun taking steps to reignite company investment and kick-start household spending. Germany this month announced a 50 billion-euro package for its economy, while France is planning measures to help its automobile industry. In the U.K., the government cut its value-added tax to spur consumer spending.
“It’s very important that they’re trying to do this in a coordinated manner,” said Iain Begg, professor at the London School of Economics. The impact of the measures “depends on whether the resuscitation of the banking system is complete yet, if the lending freeze continues.”
Small-Business Loans
The turmoil has also prompted action in the U.S., where the Federal Reserve has undertaken an $800 billion effort to make credit more accessible, which includes funding to support consumer and small-business loans.
The commission has forecast that the euro-area economy will contract for three straight quarters and expand only 0.1 percent next year, which would be its worst performance since 1993. European Central Bank President Jean-Claude Trichet said today there may be “negative figures” for economic growth in the euro area next year.
The ECB, which is due to publish new forecasts for growth and inflation on Dec. 4, has already cut its benchmark interest rate by one percentage point to 3.25 percent since early October and signaled a further reduction next month. The Bank of England, Bank of Canada, and the Fed in the U.S. have also lowered rates, while China’s central bank reduced its key lending rate by the most in 11 years today.
Mortgage Market
As part of their response to the crisis that began more than a year ago with the collapse of the U.S. subprime-mortgage market, central banks across the globe have also pumped funds into money markets, while governments have bailed out banks and guaranteed bank loans to protect the financial system.
In the U.S., where the Fed has reduced its benchmark rate by 4.25 percentage points since September 2007, to 1 percent, and rescued Bear Stearns Cos. and American International Group Inc. from failure, President-elect Barack Obama, 47, said he aims to create 2.5 million jobs in a two-year plan that may be as big as $700 billion.
Some European countries may be limited in how much capacity they have for fiscal measures as slumping economic growth pushes their budget deficits close to or even beyond EU limits of 3 percent of GDP. France will breach the limit for the next two years, while Ireland’s shortfall will soar to 6.8 percent in 2009.
Deficit Rules
The EU has said it will apply its deficit rules “flexibly,” a message the U.K. has already taken on board. British Chancellor Alistair Darling this week cut the value- added tax rate to 15 percent from 17.5 percent for 13 months and announced other measures that will push the country’s deficit to an estimated 8 percent of GDP in the next fiscal year.
“We are in a situation of exceptional circumstances, and in these exceptional circumstances one can use the maximum flexibility,” Barroso said. Countries may avoid punishment if deficits are “close” to the EU limit of 3 percent and breaches are “temporary.”
To contact the reporter on this story: Meera Louis in Brussels at mlouis1@bloomberg.net; Fergal O’Brien in Dublin at fobrien@bloomberg.net.
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