There is currently a lot of talk about budgetary stimulus policies to cope with a possible recession in the US.
This debate has been triggered to a great extent by the package of measures being discussed across the Atlantic. But when it comes to the European Union, and the euro area in particular, does the economy really need the same kind of helping hand? In my view, while we are not enjoying the good times that we were before last summer, we are not in bad times either.
First, and to put this debate in context, it is important to note that many EU Member States have drawn up budgets for 2008 involving tax cuts that, when taken together, are likely to reduce public revenue by about 0.2 to 0.3% of GDP this year. As a consequence, the average budget deficit in the EU will, for the first time, probably record no improvement this year, after having declined from around 3% of GDP in 2003 to around 1% in 2007 (a little less for the euro area). Take the example of Germany, where the reduction of 10 percentage points in company tax from this year and lower contributions for unemployment insurance will probably put the budget back into the red ( 0.5%), whereas it had been balanced in 2007. In France, last summer’s fiscal package, including the sharp cut in inheritance tax, the fact that mortgage interest will be tax-deductible and the lowering of the overall tax ceiling for individuals to 50%, will put on hold the process of budgetary consolidation and debt reduction. There are also, albeit to a lesser extent, tax reductions in Italy (e.g. on local property taxes), Spain (cuts in corporate taxes; tax credits for families), Luxembourg (reduction by 6% of personal income tax brackets), Denmark (income taxation is reduced by some 0.6% of GDP), Poland (lower social contributions and tax breaks for families) and a number of other countries.
We do not therefore find ourselves in – nor are we emerging from – a period of austere economic policies, contrary to the impression given by certain articles or commentators. To be sure, there has been an all-round drive for budgetary consolidation in the past few years which is now helping us withstand the current external shocks more assuredly. And there have been many such shocks! Be it the price of petrol, which has increased by 25% since the summer and by about 200% since 2004; or basic food prices, shooting up on the back of poor harvests and rising global demand; And not to mention the marked slowdown in the US following the “sub-prime” crisis and impact in the construction and property sectors.
A majority of countries in the EU are in a more comfortable position to handle these shocks than others. These are the countries that have made use of the resurgence in growth since mid 2005 – though for some it had never gone away – in order to move closer to balancing the public books. These are also the ones which now enjoy the budgetary room for manœuvre, should they need it, to allow automatic stabilisers to be triggered (i.e. absorb a possible drop in public revenue and cope with increased expenditure) without having to worry about breaching the 3% public deficit threshold. When you look at it, this is ultimately what the leaders of certain international organisations are calling for.
In a sense, the fiscal loosening planned for this year fits in with this rationale. The automatic stabilisers, if they came into play, would allow support to be given to those most affected by the slow economy, even if public revenue goes down. We would thus have nothing to be ashamed of when comparing the support given to our economies with what the US authorities have in mind.
In the meantime, let us keep a cool head and think carefully before succumbing to the sirens’ songs. The economic situation may have changed since the spring, and even since the summer, but we are far from a recession in the US and even further from one in Europe. Also, we should remember that the need for an economic stimulus package on the other side of the Atlantic could stem from the fact that the burden of public expenditure in the US is so much less, as a percentage of GDP, than in the EU (under 36%, as compared with over 46%). The more progressive taxation we have in Europe and the more generous social security systems mean that demand can be underpinned much more promptly and more effectively than by means of one-off budgetary stimuli.
The best response to the growth and employment challenges facing us remains structural in nature. For example, the best way to address high petrol prices is not to bolster existing petrol and oil consumption levels but to put in place mechanisms and structural reforms that are conducive to saving energy (by improving public transport, for instance). In the medium and long term, we have to encourage greater energy-efficiency and the use of alternative forms of energy.
Our reaction to the repercussions of the financial turbulence on the real economy should, be more or less the same: to hold firm and not grasp for the easy solutions – ready made maybe, but expensive in the short term and counterproductive in the long term – of increasing public deficit and public debt the minute conditions start to get a bit choppy. Above all, we must persevere with the structural reforms that have already led to the creation of over 15 million jobs in Europe since the launch of the euro and the lowest levels of unemployment for 25 years; make European companies more competitive by backing sectors where there is value-added, excellence and innovation; target markets in those regions that are seeing strong growth; free up the potential for growth which is still being held back in the service sector and regulated professions. In short, the Lisbon Agenda for Growth and Jobs.
The fundamentals of the European economy are healthy and robust and the budgets for 2008 already include a significant stimulus. At this juncture, therefore, it is far from evident that Europe needs an additional budgetary stimulus. We should allow the budgetary stabilisers to work, without jeopardising consolidation in the longer term. The Stability and Growth Pact, which was revised in 2005, has served us well: public finances have been consolidated and we enjoyed a level of growth in 2006 and 2007 not seen since the beginning of the decade. Let’s think twice – and above all, let’s think together – before falling back into bad habits.
Member of the European Commission
Responsible for Economic and Monetary Affairs