'False Labeling' in Brussels EU Ready to Present Stimulus Package

On Wednesday the European Commission will present a giant stimulus package to meet the looming economic downturn -- with an estimated €130 billion in initiatives. But Brussels has neither the money nor the ability to forge an economic program.

The situation is getting serious. Europe's industries are running out of contracts. Economists predict that next year will bring reduced working hours and layoffs and that times will get bleak. The US Federal Reserve and Treasury Department on Tuesday announced a new package totalling $800 billion to make it easier for small businesses, students and home buyers to borrow money. And in Europe, state economic stabilization policies that fell out of favor long ago have suddenly found many new backers.

European commission President Jose Manuel Barroso

European commission President Jose Manuel Barroso

On the European Commission, where European President José Manuel Barroso and 26 other commissioners direct the business of the European Union and where "the market" has been viewed as the best force to steer the economy for a long time, "the state" was supposed to keep its fingers out of everything. Now it's all different.

The states -- or, more precisely, their taxpayers -- have just been forced to rescue the global banking system because its leaders proved to be little more than incompetent gamblers. Now more tax revenues are supposed to avert -- or cushion -- a threatening crisis in the global economy. Taking their places at the head of this phalanx in the fight of "politics against recession" are Barroso and his commissioners. They plan to bring forward an enormous economic program on Wednesday full of prescription for battling the crisis.

"Temporary cuts in value-added (or sales) tax" is one of the proposals that could be "quickly implemented to give a strong fiscal impulse to promote consumption," reads one of the proposals. Additional caps should also be placed on the value-added taxes for certain labor-intensive services, like those performed by tradesmen, cooks or waiters. The Commission also intends to give tax concessions to especially climate-friendly products and to lower income taxes on low-income earners.

But that's still not enough. The Commission will also call on EU member states -- especially those that are not deep in debt -- to use national spending packages to "quickly stimulate demand and to lift consumer confidence." According to the plan, the European Central Bank (ECB) should lower interest rates even further and the European Investment Bank (EIB) should offer cheap credit for measures meant to conserve energy and for the production of climate-friendly automobiles. In all, Brussels wants a package worth 1 percent of Europe's economic output -- the equivalent of roughly €130 billion.

The problem, though, is that Brussels has neither the money nor the ability to shape a European economic program. Money and ability lie with the member states themselves, and -- as usual -- they can't agree on a strategy. Every government does as it sees fit. Brussels' super crisis-rescue package is not just a package of well-meaning yet unbinding suggestions; it's also the simple sum of previously announced national measures. Barroso, nevertheless, can distribute research subsidies or infrastructure aid within the EU's budget faster than previously thought. But he has no other means, and won't be given any. Elmar Brok, a German member of the European Parliament, has unsurprisingly spoke of "false labeling" in Brussels.

Barroso says the package is based on a "groundwork of coordinated measures by member states, which are tailored to each specific situation." The head of the EU's largest economy, Chancellor Angela Merkel, liked the sound of that and proceeded to do just what Germany's "specific situation" required. Her government has approved injections of capital which over the next two years will total €32 billion. She refuses to do more, and she's said nothing about a quick reduction in taxes.

French President Nicolas Sarkozy could not talk her out of this strategy on Monday in Paris. The British example doesn't interest her, either. Prime Minister Gordon Brown's government wants to lower its value-added tax (or VAT) for 13 months, from 17.5 to 15 percent, starting in December, and demand even lower rates in some instances, such as restaurant bills. To balance these cuts the government wants to raise income tax at very top of the scale, and skim more from sales of alcohol, tobacco and gasoline.

All European governments are currently facing the same task of building crisis packages. Most choose from a menu that includes public works expenditures, tax cuts, monetary handouts, benefits for the poor or for families with children -- the kinds of things that can be pushed through quickly.

But no one has come up with a convincing, all-encompassing strategy, and true experience among those in charge is lacking. The times when much of the world followed policies developed by British economist John Maynard Keynes have faded into the past.

His recipe, more or less, was to save during boom times and spend massively when the economy sputtered. But his antidote became unfashionable -- not least because governments rarely saved. In this age of faith in the markets, one hears only occasional calls -- from the left side of the political spectrum -- not to forget the lessons of Keynesian economics.

This crisis has changed everything -- and has forced Europeans to look for lessons from the past. It has led to some rather helpless-sounding proposals. One example is offered by the debate over reducing VAT. It's tempting to wonder whether a flat-screen television will really look more attractive if it costs €575 instead of €587.50. That would be the result of the Britain's VAT reduction.

The government in London believes this plan is a good one -- and Brussels agrees. But small businesses disagree, arguing that such a small difference won't spur consumption. On the contrary, many are now complaining of a "logistical nightmare" now that they have to re-tag all of their products.

Still, it seems difficult to imagine that Berlin won't make a similar move next year. Chancellor Merkel may be against it, but many in Germany's conservative camp both in Berlin and in the European Parliament are in favor. And Angela Merkel faces general elections in Germany next year. She has already said that her government will examine the situation once again in January to see if further steps will need to be taken to prop up the German economy. The answer is likely to be "yes."


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