Foreign Policy Blogs

US criticism of low EU stimulus spending misses the mark

The Friday conclusions of the European Council (the meeting of all EU Heads of Government or Heads of State) contained an an almost audible tone of defensiveness. The document was at pains to reiterate the huge amounts of money Europe was spending on economic stimulus. Only one sentence into the document and it read “Reviewing the considerable fiscal stimulus now being injected into the EU economy (over €400 bn)…”

Europe has been feeling pressure, most especially from the US administration, to contribute in a bigger way to global efforts at recovery through economic stimulus. So far, according to the International Labour Organisation, who have been tracking stimulus expenditure, 30 countries have announced stimulus plans which amount to 3.16% of global GDP (detailed word doc with figures here). The major plans include China’s €586 billion and the $700 billion Obama Stimulus plan (and 2 previous Bush plans which together add to almost a trillion dollars). As an aside, the whole debate on whether stimulus will actually work is considered by the Presdent of my alma mater, DCU here.

In contrast, the headline Stilulus Plan that was agreed at the European Council last Thursday was only €5 billion, leading to the below cartoon in the Irish Times which reflects a perception that the EU is not pulling its weight in reviving the Global economy.

US criticism of low EU stimulus spending misses the mark

Martin Turner of the Irish Times shows how the US see the EU’s Stimulus Plan (Irish Times).

French President Nicolas Sarkozy showed that policy divisions lie behind this disagreement when he stated “the problem is not about spending more, but putting in place a system of regulation so that the economic and financial catastrophe that the world is seeing does not reproduce itself. The Wall Street Journal identifies the undercurrent of this division between the US & Europe

For continental Europe, focusing on underregulation helps deflect blame for the crisis to the more lightly governed financial markets of the U.S. and U.K. The American push for more stimulus, in turn, shifts the blame to Europe for being too slow to respond to the ongoing economic slump.

The US is pressurising Europe to increase spending nonetheless and as I blogged before Obama sent this message with the Irish Prime-Minister from St. Patrick’s Day celebrations in the White House last Tuesday. Also last Tuesday Paul Krugman, an American economist and Nobel laurate was in Brussels expressing his concerns about the low levels of expenditure of the European (and the US) stimulus plans. Guenter Verheugen, the Enterprise and Industry Commissioner in the EU responded to Krugman’s statement, saying that “We think it is a little bit too early to judge whether the stimulus packages which we have produced are working or not.” For Verheugen, a German, an added concern is that member of the Euro-zone (those EU states that use the Euro) do not to exceed, 3% of GDP in debt which is part of the criteria for being part of the Euro-zone. The German fear, as laid out well by the Wall Street Journal is that “other countries will splurge and end up with more debts than they can repay. Then, the thinking in Berlin goes, German taxpayers will have to bail out spendthrift Italians and others.”

That is not to say that Europe is not contributing to global stimulus plans. As the EU made clear in the European Council conclusions it will be spending approximately €400 billion over 2 years, that is 3.3% of EU GDP which is roughly in line with the global norm of 3.16% mentioned above, the EU component of this spending is approxmately €30 billion. Obama’s plan on the other hand is 2.5 %  of US GDP spread over three years.

Europe also appears to have a different view of  how Europe can contribute to recovery. The European stimulus funds are  targeted to generate “new investments, boost demand, create jobs and help the EU move to a low-carbon economy”. The “global” aspect of this is the pledge to give €75 billion more to supplement the IMF’s funds contingent on reciprocation from the US/China.

During the summit, leaders expressed satisfaction with how Member-States had used spending plans to ameliorate the worst parts of the Global recession. Chancellor Merkel said in the German Parliament last Thursday that her nation “was doing more than most to support the world economy through higher spending and lower taxes”. She ended the summit by saying that “A competition to outdo each other with promises will not calm the situation” – Europe certainly looks like it will not be attempting to raise the stakes anytime soon.


 

Author

David Garrahy

David Garrahy works in Brussels monitoring European Union activites. He is originally from Ireland and studied a Degree in Law & European Studies at the University of Limerick before earning a Masters in Globalisation at Dublin City Universty. Previously he has worked in the Irish Department of Foreign Affairs, the European Commission and as a Legislative Aide for an Irish Senator. His involvement in the EU has included working for the Irish Forum on Europe and campaigning in Referenda in favour of the Nice & Lisbon Treaties.

Area of Focus
Europe; Globalisation; European Comission.

Contact

Great Decisions Discussion group