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

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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
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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

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Aggregate size of stimulus packages ( GDP)
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Size of stimulus packages by country ( GDP)
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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

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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 years 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)

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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 (RD, 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

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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.