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Presentation to TURI Seminar ‘European Responses to the Crisis

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1 Presentation to TURI Seminar ‘European Responses to the Crisis
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

2 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

3 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% expenditure side 48%

4 Size of stimulus packages by country (% GDP)
AT BE DK FI FR DE HU IT LU NL NO PT ES SE UK Overall size of fiscal package 2.4 0.9 2.2 1.5 1 2.64 0.2 4.6 in 2009 0.4 1.2 0.7 1.75 0.45 0.75 2.3 1.25 1.4 in 2010 0.5 0.3 0.1 0.51 1.15 -0.1 expenditure side 30 60 20 64 46 50 80 84 75 34 10

5 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 p.p. of EU27 GDP, but more in 2010). But not obvious that small countries are free-riding

6 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)

7 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

8 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.

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