Faqs on the European Economic Recovery Plan

MEMO/08/735

Brussels, 26 November 2008

FAQs on the European Economic Recovery Plan

What is the objective of the Recovery Plan?

The objective is to drive a coordinated EU response to the economic crisis,that builds on the unprecedented level of coordination shown in response to the financial market crisis. The priority is to treat the symptoms of the economic crisis and protect jobs and purchasing power in the short-term while also investing in Europe's long-term economic health and in boosting the fight against climate change.

As President Barroso has said, the package must be "big enough and bold enough to work in the short-term, yet strategic and sustainable enough to turn the crisis into an opportunity in the longer-term. And we need to make sure that help comes to those most in need."

The package is not a "one-size fits all" proposal. It takes account of the differences between MemberStates in terms of their budgetary situations and outlook, their exposure to the financial and economic crisis and whether or not they are having to correct macro-economic imbalances, etc.

What are the main elements of the Plan?

The Commission's Recovery Plan combines coordinated national action with EU policy measures in a mutually reinforcing way.

It includesa timely, targeted and temporaryfiscal stimulus of around 1.5% of EU GDP or 200 billion euros,within both national budgets (around €170 billion, 1.2% of GDP) and EU and European Investment Bank budgets (around €30 billion, 0.3% of GDP).The Plan fallsinside the Stability and Growth Pact (SGP), but uses all of its flexibility.

The fiscal stimulus is complemented by proposals to speed up structural reforms under the Lisbon Growth and Jobs Strategy in all Member States and in particular those who most need to act in order to make their economies more competitive and ensure medium-term budgetary sustainability. Mechanisms for the monitoring by the Commission and the Council of progress on reforms is strengthened.

This fiscal stimulus and accompanying structural reforms arecomplemented by "smart investment" measures at both European and national level, with the priority being to preserve and create jobs now and in the future while accelerating the transition towards a knowledge-based and low carbon economy.

The Recovery Plan sets out a framework for how funds should be used to stimulate investment, "green" Europe's economies and boost energy efficiency. It proposes mobilising existing funds – including social and cohesion funds, where up to €6.3 billion of payments will be brought forward - to help unemployed people, and help with training and retraining.

A key part of the Commission Plan is a "smart mix" of regulation, R+D, national investment , Commission funding, European Investment Bank support and public private partnerships for forward looking investments in key sectors like cars and construction.

The Recovery Plan also includes proposals to stimulate labour markets and increase demand for energy efficient goods and services through innovative use of taxation.

It includes further concrete measures to help SMEs, as well as calling for rapid progress on the "Small Business Act" initiative already presented by the Commission (see IP/08/1003).

What happens next? How will the Plan be implemented?

The Commission will be asking EU leaders to endorse the Plan at the European Council on 11-12 December and to implement it immediately. The earlier this is done, the better the Plan will work.

There will need to be close coordination at both political level, notably through Finance Ministers, and technical level throughout the implementation of the Plan.

Why is co-ordination of fiscal measures so important?

The benefits of individual Member States' fiscal measures will be much greater if they are part of a co-ordinated European response which will create multiplier effects.

Equally, countries who try to "go it alone" tend to run into problems; they get punished by capital outflows; some of their stimulus leaks into imports from other countries and they get nothing in return. A co-ordinated approach will avoid these difficulties.

Why do we need a fiscal stimulus and why not a bigger one?

The fiscal stimulus istimely, targeted, temporary and coordinated.

It is large enough to have a major impact in boosting demand and purchasing power and thus in protecting jobs. Without such a stimulus, there is a risk that demand, investment and employment could spiral downwardsin a lasting and deep recession, leading to a major fall in tax revenue and increase in spending on social benefits, with a resulting threat to public finances in the medium-term.

The fiscal stimulus will help avoid the downward spiral described above but limits borrowing to a level which Member States will be able to pay back without compromising medium-term budgetary sustainability – provided the right accompanying policies are implemented in line with the Recovery Plan.

Taking on excessive levels of debt would result in further – and possibly worse - economic crises and unemployment in the future.

How does the proposed fiscal stimulus take account of the fact that Member States have different starting positions?

Co-ordination does not mean that all Member States should adopt the same approach. This would make no sense.

Those who took advantage of the good times to achieve more sustainable public finance positions have more room for manoeuvre now. For Member States, particularly those outside the euro area, facing significant external imbalances, the aim of budgetary policy should be to correct those imbalances.

So this is not a one-size fits all Plan. As President Barroso has put it: "Everyone is suffering from this crisis and everyone needs treatment. But not everyone needs the same pill."

Neither is the fiscal stimulus a zero sum game where Member States make payments into a central "pot" and one euro less paid in by one country means another has to pay one euro more. Instead, this is about a coordinated fiscal response where each MemberState, within an overall European framework, takes the taxation and investment measures which suit its economic situation and strategy, thus supporting its own economy to the maximum and also helping others.

The fiscal stimulus is not a measure in isolation. It is intrinsically linked with the rest of the Plan. The Commission is proposing using the funds to finance investment in key strategic areas, to create jobs now and build the basis for a dynamic and sustainable 21st century economy.And under the Plan, the fiscal stimulus is accompanied by strong provisions to make sure it does not jeopardise medium-term budgetary sustainability – including stepping up structural reforms especially in those Member States whose budgetary position most demands it.

Why does a fiscal stimulus in one MemberState also help others?Why should Member States with strong budgetary positions do more than those who have not?

In a single market, boosting domestic demand in Member State X also boosts demand for imports in Member State X which in turn boosts demand in Member State Y (and all the others).

If that stimulus can help return Member State Y to the growth path, there is a secondary effect whereby demand in Member State Y for exports from Member State X is also boosted. In time and once multiplied across all 27 Member States, this can create a powerful virtuous circle, boosting overall growth and helping pay back the borrowing which has financed the fiscal stimulus in the first place.

Conversely, no MemberState has an interest in others funding a fiscal stimulus by taking on unsustainable levels of debt: they would risk jeopardising their public finances and triggering a spiral of debt, recession and unemployment which would drag other Member States down while undermining confidence in governments. In the euro area, this would be particularly damaging for other Member States. Outside the euro area, it could lead to pressure on the national currency and to large rises in inflation.

What are the main differences in Member States' starting positions?

These can be seen in detail in the Commission's autumn economic forecast (see IP/08/1617). For example. growth for 2009 is forecast to vary from around or over 4% in Slovakia, Bulgaria, Romania and Poland, to a contraction of 2.7% in Latvia. Negative growth is forecast also in UK, Ireland, Spain and Estonia, with France, Italy and Germany at standstill.

Commission forecasts for government deficits for 2009 vary from nearly 7% in Ireland to a surplus of 3.6% in Finland with among the biggest Member States, the UK deficit predicted at 5.6%, France at 3.5%, Italy and Spain at just under 3% and Germany at 0.2%. Some economists in some Member States have expressed concern about deflation unless a fiscal stimulus is quickly injected, while there is double digit inflation in others (Bulgaria, Estonia, Latvia, Lithuania).

What is the balance between tax cuts and extra public spending?

The plan does not determine what the balance should be. It identifies a range of measures which can be effective in boosting the economy (e.g. public expenditure, indirect tax reductions or guarantees and loan subsidies). It is up to Member States to decide on the measures or mix of measures they wish to implement. This will depend on their particular national situation.

What tax cuts does the plan propose?

The Commission will propose reduced VAT rates for green products and services, related to the building sector. It has already proposed a Directive to make permanent reduced VAT rates for labour intensive services; the Council should now adopt this proposal as soon as possible (before the 2009 Spring European Council).

However, taxation is largely a national, not a Community, matter. The plan makes a number of suggestions for tax cuts, e.g. reduced social charges on lower incomes to promote the employability of lower skilled workers. However, it is up to Member States to decide whether or not they wish to take up these suggestions.

Is the Commission proposing suspension of the Stability and Growth Pact? If not, why not?

The Recovery Plan reiterates the importance of staying within the Stability and Growth Pact, which is part of the solution, not part of the problem.

A fiscal stimulus is essential, and can make a big contribution to turning the situation round and putting Europe back on the growth path. The Stability and Growth Pact provides a common and credible framework for policy coordination. Member States putting in place counter-cyclical measures will be invited to submit an updated Stability or Convergence Programme by the end of December 2008.This will spell out exactly how the MemberState in question plans to reverse the fiscal deterioration and to resume progress towards it medium term objective. The Commission will assess both the budgetary impulse measures and the updated programmes.

To anchor budget deficits and debt developments and ensure that a medium-term perspective is taken into account, the Commission will always prepare a report according to Article 104(3) of the Treaty if the 3% of GDP deficit threshold is breached unless the excess over the reference value is not exceptional, temporary and close to the threshold.

While the current economic situation may certainly qualify as "exceptional", there will be little room for manoeuvre when deciding if an EDP should be pursued or not as few cases are likely to fulfil the conditions of closeness and temporariness.

This does not mean there is little scope for flexibility in the Pact. The Recovery Plan will emphasise again the importance of using the full flexibility offered by the Pact. In particular, period longer than usual to bring the deficit back under the 3% ceiling will be considered.

What will the Plan do for the most vulnerable in society and the lower skilled?

This group are at risk of being the most badly hit by the downturn and its effects may linger longest for them, unless effective help is provided. They are therefore a major focus of the plan.

In a downturn, the low skilled are often the first to lose their jobs. By stimulating activity and boosting confidence, the plan will help to keep job losses to a minimum. Firms may feel that, with a stimulus on the way, it is worth retaining employees, who they might otherwise have laid off.

Workers have already been made redundant or may lose their jobs in the coming months. It is vital to reintegrate these people back into the labour market as quickly as possible. The longer someone is out of the labour market, the harder it becomes for them to get back into employment.

The plan therefore includes a major European employment support initiative, with the Commission working with Member States to re-programme European Social Fund expenditure to ensure workers have the right skills to stay in jobs and find new jobs quickly if they are laid off. Member States will be asked to produce new Operational Programmes with the emphasis on labour market activation policies, targeted particularly at the low skilled and most vulnerable.

The kind of measures envisaged include making sure that the employment services are fully equipped and ready to provide people with personalised counselling and job search assistance, intensive (re)- training, apprenticeships, subsidised employment schemes and grants for self employment and business start-ups. The Commission will bring forward a new initiative next month ("new skills for new jobs")aimed at anticipating what skills will be necessary in tomorrow's labour market so we have the right strategies in place to avoid a mismatch between jobs available and workers skills.

In addition, the plan calls on Member States to reduce labour taxation (social contributions) on lower incomes. This will promote the employability of lower skilled workers, helping them to find new jobs and hopefully preventing them from being laid off in the first place.

The Plan also encourages innovative solutions, such as temporary hiring subsidies for vulnerable groups or service cheques for household care.

Subsidised services, such as care or home insulation, for those on low incomes or the elderly can meet currently unmet needs and, at the same time, generate jobs. There are successful examples of this kind in many Member States which could possibly be copied elsewhere.

To aid job creation in the fast growing sectors, such as the care sector, the Council is urged to adopt the proposed Directive to make permanent reduced VAT for labour-intensive services.

Integrated flexicurity strategies are especially necessary in a time of economic crisis – ensuring adequate social protection for those out of work – without removing incentives to work.

There are other measures in the Plan which will also help the most vulnerable, such as the suggestion that financing for energy-efficiency investments in social housing should be available via the Structural Funds (this is not currently the case).

What changes will be made to the European Globalisation Adjustment Fund?

The idea is to make the EGAF a more effective early intervention instrument. and to fully exploit its potential as a part of crisis response. There is no point in locking the stable door after the horse has bolted.

The Commission will propose revising the rules of the Fund and review its budget so that it can intervene more rapidly – either to co-finance training and job placements for those who are made redundant or for the retention of skilled workers who will be needed once the economy starts to recover.

Does the economic crisis mean efforts to tackle climate change will need to slow down?

The opposite is the case. The Recovery Plan includes a smart response to the crisis which will also boost the fight against climate change by speeding up investment in energy efficiency and clean technologies. This will create jobs in both the short and longer-term and help give Europe a first mover advantage which will pay dividends in terms of economic growth, energy security and environmental sustainability.

This is all the more essential as despite the recent falls in oil prices in the short term, in the medium-term the crisis is likely to lead to higher prices as investment in exploiting new sources of oil slows down and production stagnates or falls, leading to a potential shortfall in supply when growth picks up.

How will the Recovery Plan speed up the shift towards a low carbon economy?

The Plan is packed full of measures which will work in this direction. On energy efficiency, for example, it calls on Member States to set demanding targets for public buildings and both private and social housing and to make them subject to energy certification on a regular basis. To facilitate reaching their national targets, Member States should consider introducing a reduction of tax for energy-performing buildings. The Commission also calls on MemberStates and industry to urgently develop innovative mechanisms for financing building refurbishments (with repayments being made over several years based on energy savings).