The European Union’s much-touted €200bn fiscal stimulus package is looking more and more like one of those trick cigars I remember from years ago. A trick cigar looks like a cigar. It even feels like a cigar. But when you try to smoke it, nothing happens.
In the case of the EU’s fiscal stimulus – an initiative designed to pull Europe out of its deep recession, and approved by EU leaders at last week’s summit in Brussels – one gets the distinct feeling that someone somewhere is trying to pull wool over the general public’s eyes. The €200bn is there on paper, but there is not much evidence of it in the real world.
This is explained very clearly by David Saha and Jakob von Weizsäcker in a freshly published study for the Bruegel think-tank, “Estimating the Size of the European Stimulus Packages for 2009″. They say only one country in the 15-nation eurozone is genuinely applying the classic Keynesian recipe of increased deficit spending to counter a downturn. That country is Spain.
Particularly startling is their analysis of the measures recently unveiled in Italy by Prime Minister Silvio Berlusconi’s government. Officials in Rome portrayed this as an €80bn stimulus, or roughly 5 per cent of Italian gross domestic product. What nonsense. The Bruegel economists conclude that the Italian measures announced since September add up not to a stimulus, but to the opposite - a small fiscal tightening of €0.3bn!
As it happens, there are very good reasons why it would be imprudent for Italy to embark on a spending spree right now. With a public debt higher than its annual economic output, and with financial markets acutely nervous about traditionally profligate borrowers such as the Italian state, Berlusconi and his colleagues need to show great care in navigating their way out of the recession.
As the Italian example suggests, there is rather more support in private around Europe for Germany’s well-known apprehension about the EU-wide fiscal stimulus than is admitted in public. To name just a few countries – in and outside the eurozone – that share Germany’s wariness, think of Lithuania, the Netherlands, Poland and Sweden. And, of course, the European Central Bank is sympathetic to Germany’s position, too.
The bottom line is that, whatever the severity of the recession, Europe’s leaders are loath to do anything that might imperil the euro and the cohesion of the eurozone. For them, this is the multi-national European project that matters. As far as possible, therefore, they will try to stay within the limits set by the Stability and Growth Pact, the EU’s fiscal rulebook. And this means restricting the scope of a European fiscal stimulus.
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