Fiscal stimulus packages in Europe in response to the crisis – a quantum of

solace?

Presentation to TURI Seminar ‘European Responses to the Crisis

and Alternatives to GDP as an Element of a Paradigm Shift’, Brussels 29 June 2009

Andrew Watt

European Trade Union Institute

http://www.etui.org

The study

Questionnaire sent to national experts

Mostly members of the TURI network

Reports from 18 of EU27 plus Norway

Represent more than 90% of EU GDP

Cut-off early April 2009

Excludes support for banks and (largely) measures decided before on-set of crisis

Aggregate size of stimulus packages (% GDP)

Simple average

Weighted average

Total fiscal package 09/10 1.70 1.79

in 2009 0.99 1.02

in 2010 0.61 0.59

     

revenue side 52% 52%

expenditure side 48% 48%

Size of stimulus packages by country (% GDP)

AT BE DK FI FR DEHU IT LU NL NO

PT

ES SE UK

Overall size of fiscal package 2.4 0.9 2.2 1.5 1 2.64 0 0.2   1    

4.6 2.4 1.5

in 2009

1 0.4 1.2 1 0.7 1.2 0 0.21.7

5 0.45 0.751.2

2.3

1.25 1.4

in 2010

1.4 0.4 1 0.5 0.3 1.5 0 0.1   0.51      1.1

5 -0.1

expenditure side

30 60 60 20 64 46     50 80 84 75 80 34 10

Main findings in aggregate

Overall size of packages much too small: around 1% 2009 and 0.6% 2010 against size of shock (6-7 p.p. of GDP)

Even allowing for larger automatic stabilisers, less stimulus than US – inappriopriate given global imbalances and initial fiscal position and (now) sharper downturn in EU

Broad expenditure/revenue side balance – but major differences between countries

Substantial variation in size of packages between MS. Germany makes a substantial overall contribution (ca. 0.54 p.p. of EU27 GDP, but more in 2010).

But not obvious that small countries are free-riding

Factors influencing size of packages

Country size: positive correlation between size of economy and size of stimulus, but very weak (0.1): no strong evidence of free riding in EU

Size of shock: quite strong negative correlation between output gap (estimate by COM) and size of package (-0.4): plausible and appropriate response

Size of automatic stabilisers: weak negative correlation between size of stabilisers (OECD estimate) and size of package (-0.2): plausible and appropriate

Fiscal ‘room for manoeuvre’: substantial negative correlation between level of government debt and size of package (-0.5) and somewhat weaker one with last year’s fiscal deficit: major concern that EU countries feel constrained in running cyclically appropriate fiscal policies by debts/deficits that are not high in historical terms (lack of fiscal federalism)

Qualitative features of the packages

Substantial national variation and use of wide range of measures (in principle appropriate). Some notable features:

Focus on business tax and contributions in many MS

VAT cuts less frequent

Not clear that tax cuts have targeted low-income groups

Increases in public investment central plank in most MS

Substantial sector-specific support

Some limited productivity/efficiency raising measures (R&D, green measures)

Very limited focus on active labour market measures and improvements in unemployment benefits

Missed opportunity in terms of green investment and ecologically dubious measures (cash for clunkers)

Explicit protectionism seems to have been avoided

Trade union involvement (and support) varies widely

Conclusions

The fiscal packages in the EU are too small they offer a ‘quantum of solace’ to Europe and fail to address global imbalances. Current self-satisfaction by policymakers completely inappropriate.

The distribution across countries varies considerably. On the positive side, to some extent this is justified economically and widespread free-riding seems to have been avoided (success for EU). However, the supposed ‘fiscal room for manoeuvre’ seems to be a binding constraint on more cyclically appropriate policies. Particularly problematic in eastern Europe (IMF). Failure of European fiscal solidarity.

Mixed picture in terms of content of the packages. Considerable focus on public investment, but concerns about distribution, lack of attention to labour market crisis and missed opportunity on green issues.