EU Stands by Stimulus in Face of Deepening Recession

By James G. Neuger

March 19 (Bloomberg) -- European Union leaders are likely to decline to pump more money into the stricken economy at a two-day summit starting today, bucking evidence of a deepening worldwide recession.

The bloc’s 27 chiefs gathering in Brussels are set to stand by a planned 400 billion-euro ($525 billion) stimulus package while haggling over which infrastructure projects are eligible for the final 5 billion euros.

“Significant additional fiscal stimulus does not seem to be on the cards in Europe,” said Nick Kounis, chief European economist at Fortis Bank in Amsterdam. “Not many countries actually have much further room.”

Two weeks before meeting President Barack Obama at a Group of 20 crisis summit, European leaders including German Chancellor Angela Merkel and French President Nicolas Sarkozy have faced criticism from some economists for underestimating the deterioration in the economy, set to shrink for the first time since World War II.

Data in the past week showed industrial production in Germany posting its largest recorded drop in January and unemployment in Britain jumping at the fastest pace since at least 1971 in February. The second nationwide strike in seven weeks in France today disrupted services to protest to what unions call Sarkozy’s “inadequate response.”

Three times last week, Merkel rebuffed Obama’s March 11 call for “concerted action around the globe to jump-start the economy,” comments that were echoed by Lawrence Summers, his top economic adviser, and Treasury Secretary Timothy Geithner.

‘Extraordinarily Dangerous’

“It’s extraordinarily dangerous that trans-Atlantic conflict is being fanned and I’m grateful to the American president that he’s told me this is an artificial debate,” Merkel said today in Berlin before heading to Brussels.”

The EU economy will shrink 1.8 percent in 2009, the European Commission predicted in January. The outlook has darkened since then, with Germany’s Kiel-based IfW institute forecasting a 3.3 percent slide last week.

Merkel played down concern that the euro region could be destabilized by rising indebtedness in countries like Spain, reeling from a downgrade in its credit rating by Standard & Poor’s in January.

“At the moment we see no need for action,” Merkel told reporters in Berlin yesterday. “We believe that the conditions are good for the euro region to remain stable.”

The summit starts at 4 p.m. today and ends around 1 p.m. tomorrow.

Making Good

Instead of pledging new money, EU leaders need to make good on prior promises to spend as much as 4 percent of gross domestic product on stimulus measures, European Commission President Jose Barroso said yesterday.

The inability to coordinate those national steps and the looming fight at the summit over infrastructure spending show the EU’s limitations, said Arnaldo Abruzzini, head of Eurochambres, which represents 19 million European businesses.

“Member states have committed hundreds of billions for their own economies,” Abruzzini said. “We’re still discussing 5 billion. It gives the idea that coordination at European level is very difficult. I doubt we’ll get something out of the summit.”

Germany plans a business boost equal to 3.4 percent of GDP, according to the Brookings Institution, a Washington-based research group. While that lags behind the U.S.’s 5.9 percent, Germany is spending more than the U.K.’s 1.5 percent, France’s 0.7 percent and Italy’s 0.3 percent.

Deficit Balloons

The emergency spending will balloon the EU-wide deficit to 4.4 percent of GDP in 2009 from 2 percent last year, the EU forecasts. Germany is leading the campaign against writing more uncovered checks, saying the bloc needs to refocus on fiscal rectitude once the economy gets back on track.

Under German pressure, EU governments on March 1 ruled out a broad-based bailout for ex-communist countries in eastern Europe, sending eastern European stocks to the lowest level in 5 1/2 years.

EU leaders will consider increasing a 25 billion-euro ceiling on EU aid to countries that are having trouble paying their bills, after doling out 6.5 billion euros to Hungary and 3.1 billion euros to Latvia.

The cap in aid, which covers countries not using the euro, was raised to 25 billion euros from 12 billion euros in December. A further boost would require unanimous agreement by the 27 governments.

The EU will push for stricter oversight of the global financial industry, with a draft summit statement calling for the Group of 20 to commit to regulation of hedge funds and credit-rating companies.

The EU will call for the monitoring of major banks by international regulatory “colleges” to be set up by the end of 2009, according to the document. That may signal a delay from the March 31 deadline the G-20 set in November.

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net