“DRIVING EUROPEAN RECOVERY”
SPRING COUNCIL March 19th and 20th, 2009
- CEEP OPINION -

1. Recent developments
Over the past months, the European economy has continued to slide. Conditions in the financial sector have remained fragile and credit flows are still far from normal.

There is now consensus that the crisis is more severe and that the recovery will take more time than expected at the end of last year when the European Economic Recovery Plan
(EERP) was put in place. International forecasts, including that of the EU Commission, have been revised downwards at relatively short intervals.

A well-designed joint policy response is thus of immediate relevance for millions of EU citizens, more than has been the case during the past fifty years of European integration.

2. The EERP
On Nov. 26th, 2008, shortly after the prospect of a significant downturn had become consensual, the Commission presented a joint “European Economic Recovery Plan”. It was
adopted by the Council on December 11th, 2008.

The Plan aims at minimising the human cost of the crisis, mostly through containing the scale of the downturn by stimulating demand and confidence. Monetary policy, which is in the competence of the ECB, is considered the first line of action. As a supplement, the EERP calls
for a timely, temporary and targeted fiscal stimulus, and for accelerating the Lisbon agenda.

The EERP thus relies on two types of measures, which follow common principles:

· First, on an increase in purchasing power through an immediate budgetary impulse of € 200 billion (equivalent to 1.5 % of EU-GDP), of which € 170 billion (1.2 % of EUGDP) should be provided through national budgets. The aim is “to boost demand in full respect of the Stability and Growth Pact”.

· Second, on measures to reinforce Europe’s competitiveness in the long term, mostly through “smart” investment in the sense of the Lisbon Strategy, and including both physical investment and investment in skills.

Moreover, the Plan calls for restoring a liable and efficient financial sector, as a pre-requisite
for a healthy and growing economy.

The Commission now expects that overall, i.e. also including the cyclical effects on public budgets, fiscal policy will provide a stimulus of more than € 400 billion (equivalent to 3.3 % of EU-GDP), spread over the period 2009 and 2010.

The volume envisaged in the Plan is considered to be fully reached. In fact, discretionary measures by Member States are assumed to account for 1.2 % of EU-GDP and support from
EU sources for 0.3 % of EU-GDP, precisely as envisaged in the EERP.

The vast majority of measures consists in support to investment or business, and intends to
strengthen demand.

As assumed in the EERP, monetary policy has been eased further: Since the adoption of the EERP, the ECB lowered its main policy rate in three further steps by a total of 1.75 %, down to 1.5 %.

No information is provided on the likely economic impact of the EERP or of monetary policy measures.

To read the entire document click on the link below.