Brussels asks EU states to back €200bn stimulus

THE EUROPEAN Commission has asked member states to back an EU-wide fiscal stimulus package worth €200 billion in tax cuts and public spending.

It has also warned that a failure to act could push the EU into a deep and longer-lasting recession that would see unemployment rise by several million people.

"Business as usual is not an option. That would lead to a vicious recessionary cycle. It would lead to falling purchasing power and falling tax revenues, to rising unemployment and the accompanying human misery," said commission president José Manuel Barroso, who has spent the week trying to cajole EU states into accepting the package.

Under the EU executive's strategy states would provide €170 billion of the stimulus through tax cuts and higher public spending, while the EU budget would provide the additional €30 billion. The €200 billion package amounts to 1.5 per cent of EU gross domestic product, €70 billion more than expected.

Several states such as Britain, Germany and France have agreed to launch fiscal stimulus packages to try to stave off a long-lasting recession. However states with large budget deficits such as Ireland will find it difficult to cut taxes or boost public spending.

The strategy recommends a range of measures to stimulate national economies including: cuts in VAT and income tax for the lower paid; higher public spending on infrastructure such as broadband, research and "green" products. It also proposes funnelling an extra €5 billion in EU cash to the European car industry, €1 billion to the construction industry and €1 billion to manufacturers.

EU subsidies will also be frontloaded to enable states to begin infrastructure projects even if they are initially finding it difficult to provide matching national cash.

"Our approach is to offer a toolbox," said Mr Barroso, who acknowledged that a one-size fits all strategy would not work in a Europe where states faced different challenges.However he said for the stimulus package to work co-ordination would be required.

He also warned EU states against unilateral action. "In our integrated single market, no national problem and no national action are without collateral effects."

The Irish Government last night effectively ruled out taking any new measures proposed by the strategy.

"The priority for countries like Ireland with relatively high general government deficits is to get our public finances back in order and this is acknowledged in the commission recovery plan," said a Department of Finance spokesman. However he added that capital investment in Ireland was running at 5 per cent of GDP or twice the EU average. This was broadly consistent with the proposed EU measures.

It is unclear whether states that have already announced stimulus packages - particularly Germany - will be willing to make any additional efforts. "We assume the current package will be sufficient," said a German spokesman when asked whether Berlin would add to its existing stimulus effort.

Taken together, national fiscal stimulus packages already announced by EU states, including Germany, Britain, Spain, the Netherlands and Hungary, amount to about half the total EU €200 billion package. France is also promising its own big national economic boost.

EU leaders will study the plan at a summit in Brussels next month by which time the commission will hope to persuade enough states to take action.