Transcript stimulus packages TURI AWatt

Fiscal stimulus packages in Europe in
response to the crisis – a quantum of
solace?
Presentation to TURI Seminar ‘European Responses to the Crisis
and Alternatives to GDP as an Element of a Paradigm Shift’, Brussels
29 June 2009
Andrew Watt
European Trade Union Institute
http://www.etui.org
The study

Questionnaire sent to national experts

Mostly members of the TURI network

Reports from 18 of EU27 plus Norway

Represent more than 90% of EU GDP

Cut-off early April 2009

Excludes support for banks and (largely) measures
decided before on-set of crisis
Aggregate size of stimulus packages (% GDP)
Simple
average
Total fiscal package 09/10
Weight
ed
average
1.70
1.79
in 2009
0.99
1.02
in 2010
0.61
0.59
revenue side
52%
52%
expenditure side
48%
48%
Size of stimulus packages by country (% GDP)
Overall
size of
fiscal
package
FI
FR
DE
H
U
AT
BE
DK
IT
2.4
0.9
2.2
1.5
1
2.64
0
0.2
1
0.4
1.2
1
0.7
1.2
0
0.2
1.4
0.4
1
0.5
0.3
1.5
0
0.1
30
60
60
20
64
46
LU
NL
NO
PT
1
ES
SE
UK
4.6
2.4
1.5
2.3
1.25
1.4
1.15
-0.1
34
10
in 2009
1.75
0.45
0.75
1.2
in 2010
0.51
expendit
ure side
50
80
84
75
80
Main findings in aggregate

Overall size of packages much too small: around 1% 2009 and 0.6%
2010 against size of shock (6-7 p.p. of GDP)

Even allowing for larger automatic stabilisers, less stimulus than US
– inappriopriate given global imbalances and initial fiscal position
and (now) sharper downturn in EU

Broad expenditure/revenue side balance – but major differences
between countries

Substantial variation in size of packages between MS. Germany
makes a substantial overall contribution (ca. 0.54 p.p. of EU27 GDP,
but more in 2010).

But not obvious that small countries are free-riding
Factors influencing size of packages

Country size: positive correlation between size of economy
and size of stimulus, but very weak (0.1): no strong evidence
of free riding in EU

Size of shock: quite strong negative correlation between
output gap (estimate by COM) and size of package (-0.4):
plausible and appropriate response

Size of automatic stabilisers: weak negative correlation
between size of stabilisers (OECD estimate) and size of
package (-0.2): plausible and appropriate

Fiscal ‘room for manoeuvre’: substantial negative correlation
between level of government debt and size of package (-0.5)
and somewhat weaker one with last year’s fiscal deficit: major
concern that EU countries feel constrained in running
cyclically appropriate fiscal policies by debts/deficits that are
not high in historical terms (lack of fiscal federalism)
Qualitative features of the packages

Substantial national variation and use of wide range of
measures (in principle appropriate). Some notable features:
 Focus
 VAT
 Not
on business tax and contributions in many MS
cuts less frequent
clear that tax cuts have targeted low-income groups
 Increases
in public investment central plank in most MS
 Substantial
sector-specific support
 Some
limited productivity/efficiency raising measures (R&D,
green measures)
 Very
limited focus on active labour market measures and
improvements in unemployment benefits
 Missed
opportunity in terms of green investment and
ecologically dubious measures (cash for clunkers)
 Explicit
 Trade
protectionism seems to have been avoided
union involvement (and support) varies widely
Conclusions
The fiscal packages in the EU are too small they offer a
‘quantum of solace’ to Europe and fail to address global
imbalances. Current self-satisfaction by policymakers
completely inappropriate.
The distribution across countries varies considerably. On
the positive side, to some extent this is justified
economically and widespread free-riding seems to have
been avoided (success for EU). However, the supposed
‘fiscal room for manoeuvre’ seems to be a binding
constraint on more cyclically appropriate policies.
Particularly problematic in eastern Europe (IMF). Failure
of European fiscal solidarity.
Mixed picture in terms of content of the packages.
Considerable focus on public investment, but concerns
about distribution, lack of attention to labour market
crisis and missed opportunity on green issues.