Europe's $260B Game Plan

Europe's $260B Game Plan

Lionel Laurent

A bigger-than-expected stimulus package will leave it up to individual member states to fight the downturn.

• No Stimulus For Europe Shares
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A bigger-than-expected stimulus package will leave it up to individual member states to fight the downturn.

	Jose Manuel Barroso
	European Commission

European Commission president Jose-Manuel Barroso unveiled a larger-than-expected stimulus plan for the 27-member European Union on Wednesday, which he described as a "tool box" that could turn the global financial crisis into an opportunity. But questions still remain as to whether the broad menu of options will be enough to heal Europe's divided approach to the crisis.

Although Wednesday's final figure of 200 billion euros ($258.8 billion) came in higher than the previously-mooted 130 billion-euro ($168.2 billion) figure, the proposed stimulus package gave a nod to the fractures within the European Union. Commission president Barroso admitted it would be a "complete mistake" to have a 'one-size-fits-all' package, citing the "very different situations" facing European economies; individual member states will therefore choose their own stimulus within the proposed framework.

Barroso said that individual member states would contribute 170 billion euros ($219.9 billion) towards the overall plan, with the remaining 30 billion euros ($30.6 billion) coming from the European Union's budget. He said the plan would boost demand and create "millions" of jobs, largely by helping out small businesses, relaxing employers' social charges on lower incomes and by turning a blind eye to national budget-deficit limits.

Europe's biggest economies--Germany, France and Britain--have already taken divergent paths in their bid to fight the downturn. Britain's 20 billion pound ($30.6 billion) package is targeting consumer spending by cutting the value-added tax rate for a year, but Germany and France have ruled out such a move. (See "Europe's Fractures Will Hurt Stimulus Plan.") Germany's own measures, meanwhile, have been slammed as far too weak--they have been estimated at about 0.5% of gross domestic product over the next two years, and should bring in 50 billion euros ($76.5 billion) in new investment.

"We should not get into a race for billions," Merkel told the Bundestag lower house of parliament Wednesday morning, according to Reuters. "We should walk a path of measure and middle ground, which is made-to-measure to the situation in Germany."

Taking the "middle ground" may not be enough in the current economic climate, which has seen the 15-member euro area officially slip into recession. The International Monetary Fund predicts the 15-member euro area will shrink 0.5% in 2009, while the Organization for Economic Co-operation and Development has forecast a contraction of 0.6%.

At least the European Central Bank is prepared to take up some of the slack: central bank president Jean-Claude Trichet said on Wednesday that rates could be cut in December.