In response to the global economic and financial crisis, the European Commission presented a recovery plan on 26 November aimed at spreading the financial burden between the member states and the EU.1 The plan is based on “short-term measures to boost demand, save jobs, and help restore confidence,” while promoting “smart investment to yield higher growth and sustainable prosperity” in the long term. The plan amounts to €200 billion – €170 billion from national budgets and €30 billion provided by EU funding.
Here I summarise the national plans of the Netherlands, Germany, France, the UK, Belgium, and Spain and their likely consequences.2 I also draw a distinction between general and specific measures, and those aimed at promoting investment versus consumption.
Netherlands: The rescue and recovery plansIn November 2008, the Dutch government approved a recovery plan of €6 billion. It includes:
- Tax deductions for firms that make large investments and hire workers for short periods of time. It does not offer tax refunds to the taxpayers.
- Measures to increase labour market flexibility by providing the possibility to temporarily reduce working time.
- Efforts to speed up public sector investments and payments to businesses.
The plan focuses on the economy as a whole rather than particular industries, implying no distortion to the economic structure and competition amongst firms.
On 16 January, the government added additional measures.3 Specifically, the government:
- covers export insurance for countries that have no available commercial export credit insurance;
- guarantees 50% of company loans up to €50 billion to spur investments;
- enlarges the guarantee fund for social housing and the contribution to the financing of hospitals to stimulate construction of homes and expansion of hospitals.
The recovery plan would impact on the public accounts of 2009, although only mildly since it mostly consists of guarantees. Only the €6 billion announced earlier will have a direct impact. The other measures only have an impact in exceptional conditions, when the guarantees indeed materialise. The benefits of boosting investment may produce positive effects in the medium run through additional tax receipts and higher growth and employment.
New capital in the financial systemOn 9 October 2008, the government made €20 billion available for the recapitalisation of the national banking sector. Since those funds are not enough to cover all needs, the government continues to distribute funds on the same conditions. So far, the interventions have topped €31.55 billion.
The rescue plan will, in general, have the ailing bank issue new shares that qualify as core capital without the dilution of existing shareholder structure. These shares yield a fixed dividend to the government by 8.5% (eventually higher if the ordinary shares pay a higher dividend).
Board members’ bonuses for 2008 have been cancelled and all redundancy packages are limited to one years’ salary. Finally, the existing shareholders have the faculty to redeem the state participation after 3 years at 150% of the nominal value.
In the case of ABN AMRO and Fortis Netherlands, the state nationalised the bank completely with the intention to privatise the bank in three years time again. In addition, the Dutch government provides a guarantee for loans between banks and financial institutions. The guarantee amounts to €200 billion. So far, banks have hardly used it for fear of reputational losses. The government announced on 16 January 2009 that it would increasingly stimulate the use of this guarantee to spur credit granting to businesses.
This plan has a short-term impact on the public accounts. If the privatisation or the sale of the state shares does not occur by the third year, the budgetary effects would last beyond 2011. However, since most of the money involved is borrowed on the international capital markets at quite low rates4 and the government expects quite high interest rates and dividends (up to €2.7 billion) on the capital provided, these measures will not have very large impact on the fiscal deficit. The public debt, however, will increase from 45.7% to 57.3% of GDP, including all the outflows caused by the bank assistance programme. This figure remains well below the limits of the Stability and Growth Pact (SGP) and may be sustainable over the medium term, when the acquired stakes are sold again.
The rescue and recovery plans in other EU member statesTable 1 summarises the rescue and recovery plans of Germany, France, the UK, Belgium and Spain.
Table 1. Other EU members' recovery plans | |
Country and measures | Budget consequences |
Germany | |
Recovery plan
Financial sector
|
|
France | |
Recovery plan
Financial sector
|
|
United Kingdom | |
Recovery plan
Financial sector
|
|
Belgium | |
Recovery plan
Financial sector
|
|
Spain | |
Recovery plan
Financial sector
|
|
In stimulating the economy, governments can use general measures to give consumers and companies incentives to consume and expand business. It can also direct its attention to specific industries. Given that the latter requires that the government determine which enterprises are viable and worth saving and which are not, and government generally cannot do so, it is better to use general measures and let economic mechanisms do their job.
Investment vs. consumptionWe can also distinguish between stimuli directed at investment and those directed at consumption. The investment measures will have a medium- to long-term effect, while consumption-directed measures will have a more direct effect. However, in times of crisis, when people face large debts and uncertainty, extra money for consumers will largely be used to pay off debts or boost their savings accounts. Therefore, investment measures are preferable because they have a larger effect in the end.
Additionally, governments have the possibility to advance planned public sector investments. This measure brings hardly any extra costs, since the investments were already planned, and has a large stimulating impact.
Comparing European plansThe Dutch and German plans stimulate private and public investments and provide very few consumption-directed measures. Many member states are providing tax cuts and consumption stimuli, which will most likely be saved rather than consumed. The Dutch and German plans are better, stimulating private and public investments and providing very few consumption-directed measures. However, those measures will not be enough – the forecast for the recession has worsened lately, for the whole EU as well as for the Netherlands.
The Dutch government should take additional measures and not wait until April 2009 to see how the crisis develops. One important point is the Dutch housing market, which is completely locked at the moment. The government should stimulate housing mobility, which it could do by lowering taxes on house sales. At 6% of the purchasing price, those taxes mean that new owners cannot move homes without incurring losses for a couple of years until it appreciates. Additionally, public investments in “hard” and “soft” infrastructure and private investments in research and development have to be increased and front-loaded. The former can be accomplished by advancing already-planned investments in roads, bridges, and railroads, but one could also think of investments in research institutes and universities. The second can be stimulated by tax breaks for R&D, which guarantee more long-term growth. That would be especially useful in fending off a long and dragging recession.
1 A European Economic Recovery Plan, European Commission, November 26th, 2008
2 This column is a shorter version of a briefing paper for the Annual Meeting of the Committee on Economic and Monetary Affairs with the National Parliaments on 11-12 February 2009 at the European Parliament in Brussels (updated to 21 January 2009). The author gratefully acknowledges the very helpful comments of Edin Mujagic and the excellent research assistance of Rob Nijskens.
3 “Dutch Government Announces Economic Support Measures”, Dow Jones, 16 January 2009
4 The Netherlands enjoys an AAA rating.