Commission approves €200bn stimulus package


The European Commission has approved proposals for an EU-wide fiscal stimulus package worth €200 billion to revive the struggling economies of the 27-country group.

The proposal by EU Commission chief Jose Manuel Barroso was backed during a closed-door Commission meeting and amounts to 1.5 per cent of the bloc's gross domestic product (GDP) - bigger than the €130 billion injection initially mooted.

It is to be made up of 1.2 percentage points of national budget spending and 0.3 percentage points of European Union funding, said the source, who requested anonymity. It further calls for states to cut value added tax for labour-intensive services.

The plan - which includes plans for at least €5 billion of extra funding for the hard-hit European car sector - must now be submitted to a European Union summit in December for approval by EU states.

That overall package compares with the US Federal Reserve's plan announced on Tuesday to support home and other lending with a $200 billion consumer finance facility and pledges to buy hundreds of billions of dollars of risky assets.

The EU move is a bid to bridge gaps between those EU states already embarking on national growth plans - such as Britain, Germany and France - and others, including some east European countries, who protest they cannot afford such fiscal largesse.

German Chancellor Angela Merkel warned today against EU states engaging in a competition to produce big stimulus packages for their economies. "We should not get into a race for billions," Ms Merkel told the Bundestag lower house of parliament.

The stimulus, along with the fall in revenue and rise in spending that accompany an economic slowdown, is likely to lift deficits in France, Britain, Ireland, Italy, Greece and Portugal to well beyond the EU ceiling of 3 per cent of GDP.

"This budgetary stimulus should be foreseen for a maximum period of two years (2009-2010), following which member states' budgets should commit to reverse the budgetary deterioration," said an earlier draft of the Commission paper obtained by Reuters.

European Central Bank President Jean-Claude Trichet said today there may be “negative figures” for economic growth in the euro area next year.

The ECB is due to publish its new forecasts for growth and inflation at its December 4th governing council meeting. “We are currently experiencing an extraordinary and very challenging period,” Mr Trichet said.

“Recently, the tensions have spilled over into the real economy and have dampened significantly global growth”.