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Friday, December 19, 2008

European Economy in crisis, November, 2008

In today's edition
  1. Towards a European recovery programme
  2. Commission closes antitrust case against E.ON
  3. Commission tables 200 billion euro ‘recovery plan’
  4. EU to relax budget rules to help kick-start economy
  5. France and Germany fail to agree on EU stimulus

Towards a European recovery programme

21 November 2008

The financial crisis requires "exceptional policy responses in order to preserve jobs, livelihoods, financial stability and ultimately political support for open markets," write Jean Pisani-Ferry, André Sapir and Jakob von Weizsäcker of the Bruegel think-tank in a November paper.

As far as Europe is concerned, the experts state that action should be "coordinated in order to ensure consistency and avoid free-riding behaviour". "The more open the economy is, the more governments would be tempted to free-ride and rely on their neighbours' stimulus," they argue.

However, the authors admit that coordinating action will not be easy, especially given that such cooperation would be "among a large number of countries". Furthermore, they complain that economic coordination is a complicated task because "some countries are in relatively good budgetary shape, whereas others, which already recorded significant structural deficits before the downturn, now find themselves in trouble".

The experts are deeply concerned that a budgetary stimulus could "undermine European public finances at a time when the markets are wary of risk".

To get to the bottom of the crisis, the authors argue that the European Union should "combine a substantial coordinated stimulus with measures that improve the long-term sustainability of public finances".

In their view, this should take the form of an "ad-hoc EU agreement" to reform public finances in member states that overrun their budgets, speed up the application of the Stability and Growth Pact (SGP) and commit governments to borrowing at low interest rates only. source

My comment: I sincerely hope that something good will come out of the crisis. I hope I'm not wrong, but after all, human history is spiralling from it's dawn. And the spiral goes only in one direction usually. Life is getting better. Personally, I prefer to see more governmental control to the financial systems, because they proved not to be able to control themselves. Also, it would be nice to see some form of agreement between European countries on the issues. The current systems on projects is fine, it offers some control over where the money go and why. The problem is that some countries feel they give too much, while other feel they receive too little. And that's a good reason for instabilities.

Commission closes antitrust case against E.ON

Published: Thursday 27 November 2008

The European Commission closed an antitrust case against E.ON AG Wednesday (26 November) by formally accepting the German energy giant's commitment to selling a fifth of its power generation capacity along with its extra-high voltage distribution network.

E.ON, an energy corporation based in Düsseldorf, Germany, is the world's largest investor-owned energy service provider. It has subsidiaries in most of Scandinavia, the UK, across Eastern Europe and in Russia. In order to avoid anti-trust fines from the Commission, last February E.ON made an offer to sell its electricity transmission system network "to an operator which would have no interest in the electricity generation and/or supply businesses" (EurActiv 29/02/08).

In a press release, the Commission states that it adopted a decision that renders legally binding a commitment by E.ON to divest around 5,000 MW of its generation capacity to address concerns regarding the electricity generation market.

The EU executive recalled it had concerns that E.ON may have withdrawn available generation capacity from the German wholesale electricity markets (to raise prices), and may have deterred new investors from entering the generation market.

Furthermore, the Commission had concerns that E.ON may have favoured its own production affiliate for the provision of balancing services, while passing the resulting costs on to final consumers and preventing other power producers from exporting balancing energy into its transmission zone.

EU antitrust chief Neelie Kroes welcomed the solution to the long-standing problem.

EU spokesman Jonathan Todd said the European Commission was relieved that the E.ON case had not ended up in court.

If E.ON were to break its commitments, the Commission could impose a fine of up to 10 percent of its total turnover without having to prove any violation of the EU Treaty's competition rules, the EU executive stated.

In a press release, E.ON welcomed the Commission's decision and presented it as a success. source

My comment: A win-win situation, obviously. Then why did they have to go trough all the trouble anyway? I only can applaud the decision and mostly the last paragraph that the Commission can impose fines without proving guilt. That's a fine way of doing politics. And I don't like EON anyway. The Bulgarian filial isn't playing nicely.

Commission tables 200 billion euro ‘recovery plan’

27 November 2008

The European Commission on Wednesday (26 November) suggested that EU countries should spend billions of euro to kick-start their economies, saying it would tolerate higher budget deficits under strict conditions and for a limited period of time.

On 14 November, the countries of the 15-member euro zone officially entered a recession, recording a 0.2% decline in Gross Domestic Product (GDP) for the second quarter in a row (EurActiv 14/11/08).

The plan proposes a fiscal stimulus of around 1.5% of EU GDP or €200 billion, higher than the €130 billion that had been floated earlier.

Most of the money will be drawn from national budgets, with EU countries asked to contribute €170 billion or 1.2% of the EU's GDP. The rest - around €30 billion or 0.3% of GDP - would come from the EU's own budget and the European Investment Bank (EIB).

Presenting the proposal on Wednesday, European Commission President José Manuel Barroso said: "Exceptional times call for exceptional measures. The jobs and well-being of our citizens are at stake."

EU countries are invited to draw from a "toolbox" that includes measures already adopted by some governments. Some countries have already announced fiscal stimulus plans, including Germany and the UK, that will be taken into account in the EU plan, he added.

Measures listed in the EU's 'toolbox' include:

  • Increased support for the unemployed and the poorest households, which have been hit hardest by the economic slowdown;
  • Funding large infrastructure projects such as energy networks and broadband internet;
  • Temporary VAT cuts across the whole economy, similar to the one adopted in the UK, and;
  • Lowering taxes on labour, in particular VAT on 'labour-intensive' sectors such as hairdressers and restaurants, a proposal which has been on the table for some time.

The whole package will be presented for approval by EU member states at their summit in Brussels on 11-12 December.

But while all countries are asked to contribute, the Commission insisted that "a one-size-fits-all approach […] could not work given member states' different starting points" in terms of their budget deficits and overall economic situation.

One of the main elements of the package is that it will allow countries greater flexibility with the Stability and Growth Pact, which limits public deficits to 3% of GDP. "In particular, periods longer than usual to bring the deficit back under the 3% ceiling will be considered," the Commission said.

But Barroso warned about disproportionate use of the flexibility, saying it would result in "a downward spiral of debt" that would only jeopardise growth in the future. The pact is "part of the solution, not part of the problem," he stressed.

In a statement, the Commission made clear that it "will always prepare a report" if the 3% of GDP deficit threshold is breached "unless the excess […] is not exceptional, temporary and close to the threshold".

As a second 'pillar' of the recovery plan, Barroso said measures would need to be "coherent" with the EU's longer term objectives, such as fighting climate change.

The plan, Barroso said, "can turn the crisis into an opportunity to create clean growth and more and better jobs in the future." source

My comment: It's fun to read this even if I know it won't happen like this. I mean, how European countries will give from their own limited budgets to support other countries? In theory this is very good, in practice for local crisis is fine, but in the case of global crisis in which the biggest economies take the hardest hit, I doubt it would work. But it definitely sounds nice.

EU to relax budget rules to help kick-start economy

26 November 2008

Member states will be offered "temporary" flexibility to deviate from the Union's strict budget deficit rules in 2009-2010 under an "economic recovery plan" seen by EurActiv, set to be unveiled today (26 November) by the European Commission.

The exact scope of the plan is yet to be decided upon, but it is widely understood that it will represent no less than 1% of the EU's Gross Domestic Product (GDP).

It will be presented for approval by EU leaders at their summit in Brussels on 11-12 December.

Possible measures listed in the plan include increasing public spending in support of low-income households and boosting investment in large infrastructure projects like energy, as well as temporary VAT cuts and lower taxes on labour.

In doing this, the Commission admits that "member states may be obliged to break the 3% reference value" contained in the Stability and Growth Pact, which limits EU countries' budget deficits to a maximum of 3% of GDP.

But it also insists that the measures must be "timely, targeted and temporary" and limited to two years only (2009-2010).

The Commission also makes clear that its own scope for action is limited. "Most of the economic policy levers, and in particular those which can stimulate consumer demand in the short term, are in the hands of the member states," the draft plan underlines.

The EU plan will make it easier for member states to offer direct support to companies, providing "a temporary framework of state aid rules to enhance access to finance for business".

But EU officials said direct support to companies should avoid "negative spillovers" by preventing "some member states or companies [from getting] an unfair competitive advantage compared to others".

The Commission plan is also meant to grant assistance to the ailing automobile sector. The recovery plan includes a "smart mix" of regulation, R&D, state aid and funds from the EU and the European Investment Bank (EIB) to trigger future investments into cleaner vehicles.

German Chancellor Angela Merkel and French President Nicolas Sarkozy have vowed to step up aid for ailing European carmakers, especially if the US decides to bail out their American rivals with $25 billion in subsidised loans as demanded by the Democrats. Sarkozy said: "Europe won't let the car industry down." source

My comment:I don't understand one thing. Why Italy can not support Alitalia, but France and Germany can support car industries. It simply doesn't make sense, in all the cases it's direct support for a company. I don't agree with that and I like an expression I read somewhere that pouring money in the car industry is like postponing the funeral - you're simply not helping!

France and Germany fail to agree on EU stimulus

25 November 2008

German Chancellor Angela Merkel and French President Nicolas Sarkozy ruled out joint tax cuts at a meeting yesterday (24 November), underlining Europe's difficulty in developing a coordinated response to the recession ahead of a recovery plan to be unveiled by the European Commission tomorrow (26 November).

Meeting on Monday (24 November), Merkel and Sarkozy rejected a coordinated cut in value-added tax (VAT) similar to one announced by the UK.

On Monday, UK Chancellor of the Exchequer Alistair Darling announced a VAT reduction of 2.5% (from 17.5% to 15%) as part of a wider stimulus plan which also included higher taxes for the wealthiest section of the population.

However, Merkel and Sarkozy said such measures were unfit for France and Germany. "A general decrease in valued-added tax is perhaps the answer for some countries but for Germany and France, it is not," Merkel said after the meeting.

But while they agreed on VAT, Sarkozy failed to push the German Chancellor to accept a bigger stimulus plan, coordinated at EU level. Instead, Merkel adopted a wait-and-see approach, saying Germany would review the situation in January.

She pointed out that the full effects of a €32 billion plan announced earlier this month would have to be assessed before any further measures could be decided upon.

Sarkozy, who has been pushing Germany to do more to kick-start the economy, let his irritation show. Talking about the economic stimulus, he said: "France is working on it, Germany is thinking about it." source

My comment: Nicely put Monsieur Sarkozy. Even if not really correct. I don't see what France is doing to help the crisis. Quite on the contrary, I start to think that this crisis was much more expected that we think. Check out this, for example. Societe Generale knew about the Madoff scandal, but it protected only its own clients. Fun enough, right? Those are major banks, I somehow doubt they knew about a problem, but didn't mention it. Why? They are in no way winning, because some else will loose his/her money. Quite the opposite, they can only win if they show how much better they are from all the rest. But they didn't. The question is why. And why the very same bank lost 5 billions of euro, because of unauthorised transactions by 1 person! Very very suspicious!

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