EU plans to spend €130bn on economic package

THE EUROPEAN Commission is planning a €130 billion economic stimulus package to keep the 27-nation bloc going in tough financial times.

A commission spokesman admitted yesterday evening that such a programme existed, but said that the final value had yet to be agreed.

The plan is for EU leaders to agree next month to each contribute 1 per cent of their gross domestic product (GDP) to the pot, combined with pre-existing commission funds.

A spokesman for the Department of Finance said that it was too early to comment in detail, but that the Government "awaited the commission's proposal with interest".

Resistance to the economic stimulus package is already forming in European capitals.

In Berlin, German chancellor Angela Merkel's spokesman welcomed and watered down the programme in one breath yesterday evening.

"We could imagine such an economic impulse of 1 per cent of GDP but it must be offset against national measures," said Dr Merkel's spokesman, Ulrich Wilhelm.

Last week chancellor Merkel agreed to a domestic stimulus package, but only after long resistance.

Berlin has valued its domestic economic stimulus package at €32 billion over two years, well beyond 1 per cent of GDP.

The German leader has made clear to the French EU presidency that she has little time for Europe-wide programmes.

The financial crisis has already forced Berlin to abandon its ambitious plan to balance the federal budget by 2011.

Finance minister Peer Steinbrück is putting the finishing touches to a federal budget containing €18 billion in new borrowing, 71 per cent more than he had planned.

It was unclear yesterday how the stimulus package will fit with the Stability and Growth Pact, which imposes a 3 per cent of GDP ceiling on budget deficits for euro-zone members.

Irish officials suggest it will be hard to justify making a contribution considering the country is already in breach of the euro-zone deficit rules.

But there are indications from Brussels, ahead of agreement on the package, that there might be a case for letting budget deficit breaches slide in tough economic times.

"We want to make full use of the flexibility instruments that the pact offers us, said economic and monetary affairs commissioner Joaquin Almunia.

"We don't want to ignore the pact, but it's a matter of applying the pact at a time when the fiscal and budget policy to support demand is absolutely vital," said Mr Almunia.

It will be a balancing act to adopt a pragmatic approach to deficit rules without worrying markets that the pact is toothless, pushing up borrowing costs.