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FAQs on the European Economic Recovery Plan
Commission Européenne - MEMO/08/735 26/11/2008
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Brussels, 26 November 2008
What is the objective of the Recovery Plan?
The objective is to drive a coordinated EU response to the economic crisis, that builds on the unprecedented level of coordination shown in response to the financial market crisis. The priority is to treat the symptoms of the economic crisis and protect jobs and purchasing power in the short-term while also investing in Europe's long-term economic health and in boosting the fight against climate change.
As President Barroso has said, the package must be "big enough and bold enough to work in the short-term, yet strategic and sustainable enough to turn the crisis into an opportunity in the longer-term. And we need to make sure that help comes to those most in need."
The package is not a "one-size fits all" proposal. It takes account of the differences between Member States in terms of their budgetary situations and outlook, their exposure to the financial and economic crisis and whether or not they are having to correct macro-economic imbalances, etc.
What are the main elements of the Plan?
The Commission's Recovery Plan combines coordinated national action with EU policy measures in a mutually reinforcing way.
It includes a timely, targeted and temporary fiscal stimulus of around 1.5% of EU GDP or 200 billion euros, within both national budgets (around €170 billion, 1.2% of GDP) and EU and European Investment Bank budgets (around €30 billion, 0.3% of GDP). The Plan falls inside the Stability and Growth Pact (SGP), but uses all of its flexibility.
The fiscal stimulus is complemented by proposals to speed up structural reforms under the Lisbon Growth and Jobs Strategy in all Member States and in particular those who most need to act in order to make their economies more competitive and ensure medium-term budgetary sustainability. Mechanisms for the monitoring by the Commission and the Council of progress on reforms is strengthened.
This fiscal stimulus and accompanying structural reforms are complemented by "smart investment" measures at both European and national level, with the priority being to preserve and create jobs now and in the future while accelerating the transition towards a knowledge-based and low carbon economy.
The Recovery Plan sets out a framework for how funds should be used to stimulate investment, "green" Europe's economies and boost energy efficiency. It proposes mobilising existing funds – including social and cohesion funds, where up to €6.3 billion of payments will be brought forward - to help unemployed people, and help with training and retraining.
A key part of the Commission Plan is a "smart mix" of regulation, R+D, national investment , Commission funding, European Investment Bank support and public private partnerships for forward looking investments in key sectors like cars and construction.
The Recovery Plan also includes proposals to stimulate labour markets and increase demand for energy efficient goods and services through innovative use of taxation.
It includes further concrete measures to help SMEs, as well as calling for rapid progress on the "Small Business Act" initiative already presented by the Commission (see IP/08/1003).
What happens next? How will the Plan be implemented?
The Commission will be asking EU leaders to endorse the Plan at the European Council on 11-12 December and to implement it immediately. The earlier this is done, the better the Plan will work.
There will need to be close coordination at both political level, notably through Finance Ministers, and technical level throughout the implementation of the Plan.
Why is co-ordination of fiscal measures so important?
The benefits of individual Member States' fiscal measures will be much greater if they are part of a co-ordinated European response which will create multiplier effects.
Equally, countries who try to "go it alone" tend to run into problems; they get punished by capital outflows; some of their stimulus leaks into imports from other countries and they get nothing in return. A co-ordinated approach will avoid these difficulties.
Why do we need a fiscal stimulus and why not a bigger one?
The fiscal stimulus is timely, targeted, temporary and coordinated.
It is large enough to have a major impact in boosting demand and purchasing power and thus in protecting jobs. Without such a stimulus, there is a risk that demand, investment and employment could spiral downwards in a lasting and deep recession, leading to a major fall in tax revenue and increase in spending on social benefits, with a resulting threat to public finances in the medium-term.
The fiscal stimulus will help avoid the downward spiral described above but limits borrowing to a level which Member States will be able to pay back without compromising medium-term budgetary sustainability – provided the right accompanying policies are implemented in line with the Recovery Plan.
Taking on excessive levels of debt would result in further – and possibly worse - economic crises and unemployment in the future.
How does the proposed fiscal stimulus take account of the fact that Member States have different starting positions?
Co-ordination does not mean that all Member States should adopt the same approach. This would make no sense.
Those who took advantage of the good times to achieve more sustainable public finance positions have more room for manoeuvre now. For Member States, particularly those outside the euro area, facing significant external imbalances, the aim of budgetary policy should be to correct those imbalances.
So this is not a one-size fits all Plan. As President Barroso has put it: "Everyone is suffering from this crisis and everyone needs treatment. But not everyone needs the same pill."
Neither is the fiscal stimulus a zero sum game where Member States make payments into a central "pot" and one euro less paid in by one country means another has to pay one euro more. Instead, this is about a coordinated fiscal response where each Member State, within an overall European framework, takes the taxation and investment measures which suit its economic situation and strategy, thus supporting its own economy to the maximum and also helping others.
The fiscal stimulus is not a measure in isolation. It is intrinsically linked with the rest of the Plan. The Commission is proposing using the funds to finance investment in key strategic areas, to create jobs now and build the basis for a dynamic and sustainable 21st century economy. And under the Plan, the fiscal stimulus is accompanied by strong provisions to make sure it does not jeopardise medium-term budgetary sustainability – including stepping up structural reforms especially in those Member States whose budgetary position most demands it.
Why does a fiscal stimulus in one Member State also help others? Why should Member States with strong budgetary positions do more than those who have not?
In a single market, boosting domestic demand in Member State X also boosts demand for imports in Member State X which in turn boosts demand in Member State Y (and all the others).
If that stimulus can help return Member State Y to the growth path, there is a secondary effect whereby demand in Member State Y for exports from Member State X is also boosted. In time and once multiplied across all 27 Member States, this can create a powerful virtuous circle, boosting overall growth and helping pay back the borrowing which has financed the fiscal stimulus in the first place.
Conversely, no Member State has an interest in others funding a fiscal stimulus by taking on unsustainable levels of debt: they would risk jeopardising their public finances and triggering a spiral of debt, recession and unemployment which would drag other Member States down while undermining confidence in governments. In the euro area, this would be particularly damaging for other Member States. Outside the euro area, it could lead to pressure on the national currency and to large rises in inflation.
What are the main differences in Member States' starting positions?
These can be seen in detail in the Commission's autumn economic forecast (see IP/08/1617). For example. growth for 2009 is forecast to vary from around or over 4% in Slovakia, Bulgaria, Romania and Poland, to a contraction of 2.7% in Latvia. Negative growth is forecast also in UK, Ireland, Spain and Estonia, with France, Italy and Germany at standstill.
Commission forecasts for government deficits for 2009 vary from nearly 7% in Ireland to a surplus of 3.6% in Finland with among the biggest Member States, the UK deficit predicted at 5.6%, France at 3.5%, Italy and Spain at just under 3% and Germany at 0.2%. Some economists in some Member States have expressed concern about deflation unless a fiscal stimulus is quickly injected, while there is double digit inflation in others (Bulgaria, Estonia, Latvia, Lithuania).
What is the balance between tax cuts and extra public spending?
The plan does not determine what the balance should be. It identifies a range of measures which can be effective in boosting the economy (e.g. public expenditure, indirect tax reductions or guarantees and loan subsidies). It is up to Member States to decide on the measures or mix of measures they wish to implement. This will depend on their particular national situation.
What tax cuts does the plan propose?
The Commission will propose reduced VAT rates for green products and services, related to the building sector. It has already proposed a Directive to make permanent reduced VAT rates for labour intensive services; the Council should now adopt this proposal as soon as possible (before the 2009 Spring European Council).
However, taxation is largely a national, not a Community, matter. The plan makes a number of suggestions for tax cuts, e.g. reduced social charges on lower incomes to promote the employability of lower skilled workers. However, it is up to Member States to decide whether or not they wish to take up these suggestions.
Is the Commission proposing suspension of the Stability and Growth Pact? If not, why not?
The Recovery Plan reiterates the importance of staying within the Stability and Growth Pact, which is part of the solution, not part of the problem.
A fiscal stimulus is essential, and can make a big contribution to turning the situation round and putting Europe back on the growth path. The Stability and Growth Pact provides a common and credible framework for policy coordination. Member States putting in place counter-cyclical measures will be invited to submit an updated Stability or Convergence Programme by the end of December 2008. This will spell out exactly how the Member State in question plans to reverse the fiscal deterioration and to resume progress towards it medium term objective. The Commission will assess both the budgetary impulse measures and the updated programmes.
To anchor budget deficits and debt developments and ensure that a medium-term perspective is taken into account, the Commission will always prepare a report according to Article 104(3) of the Treaty if the 3% of GDP deficit threshold is breached unless the excess over the reference value is not exceptional, temporary and close to the threshold.
While the current economic situation may certainly qualify as "exceptional", there will be little room for manoeuvre when deciding if an EDP should be pursued or not as few cases are likely to fulfil the conditions of closeness and temporariness.
This does not mean there is little scope for flexibility in the Pact. The Recovery Plan will emphasise again the importance of using the full flexibility offered by the Pact. In particular, period longer than usual to bring the deficit back under the 3% ceiling will be considered.
What will the Plan do for the most vulnerable in society and the lower skilled?
This group are at risk of being the most badly hit by the downturn and its effects may linger longest for them, unless effective help is provided. They are therefore a major focus of the plan.
In a downturn, the low skilled are often the first to lose their jobs. By stimulating activity and boosting confidence, the plan will help to keep job losses to a minimum. Firms may feel that, with a stimulus on the way, it is worth retaining employees, who they might otherwise have laid off.
Workers have already been made redundant or may lose their jobs in the coming months. It is vital to reintegrate these people back into the labour market as quickly as possible. The longer someone is out of the labour market, the harder it becomes for them to get back into employment.
The plan therefore includes a major European employment support initiative, with the Commission working with Member States to re-programme European Social Fund expenditure to ensure workers have the right skills to stay in jobs and find new jobs quickly if they are laid off. Member States will be asked to produce new Operational Programmes with the emphasis on labour market activation policies, targeted particularly at the low skilled and most vulnerable.
The kind of measures envisaged include making sure that the employment services are fully equipped and ready to provide people with personalised counselling and job search assistance, intensive (re)- training, apprenticeships, subsidised employment schemes and grants for self employment and business start-ups. The Commission will bring forward a new initiative next month ("new skills for new jobs") aimed at anticipating what skills will be necessary in tomorrow's labour market so we have the right strategies in place to avoid a mismatch between jobs available and workers skills.
In addition, the plan calls on Member States to reduce labour taxation (social contributions) on lower incomes. This will promote the employability of lower skilled workers, helping them to find new jobs and hopefully preventing them from being laid off in the first place.
The Plan also encourages innovative solutions, such as temporary hiring subsidies for vulnerable groups or service cheques for household care.
Subsidised services, such as care or home insulation, for those on low incomes or the elderly can meet currently unmet needs and, at the same time, generate jobs. There are successful examples of this kind in many Member States which could possibly be copied elsewhere.
To aid job creation in the fast growing sectors, such as the care sector, the Council is urged to adopt the proposed Directive to make permanent reduced VAT for labour-intensive services.
Integrated flexicurity strategies are especially necessary in a time of economic crisis – ensuring adequate social protection for those out of work – without removing incentives to work.
There are other measures in the Plan which will also help the most vulnerable, such as the suggestion that financing for energy-efficiency investments in social housing should be available via the Structural Funds (this is not currently the case).
What changes will be made to the European Globalisation Adjustment Fund?
The idea is to make the EGAF a more effective early intervention instrument. and to fully exploit its potential as a part of crisis response. There is no point in locking the stable door after the horse has bolted.
The Commission will propose revising the rules of the Fund and review its budget so that it can intervene more rapidly – either to co-finance training and job placements for those who are made redundant or for the retention of skilled workers who will be needed once the economy starts to recover.
Does the economic crisis mean efforts to tackle climate change will need to slow down?
The opposite is the case. The Recovery Plan includes a smart response to the crisis which will also boost the fight against climate change by speeding up investment in energy efficiency and clean technologies. This will create jobs in both the short and longer-term and help give Europe a first mover advantage which will pay dividends in terms of economic growth, energy security and environmental sustainability.
This is all the more essential as despite the recent falls in oil prices in the short term, in the medium-term the crisis is likely to lead to higher prices as investment in exploiting new sources of oil slows down and production stagnates or falls, leading to a potential shortfall in supply when growth picks up.
How will the Recovery Plan speed up the shift towards a low carbon economy?
The Plan is packed full of measures which will work in this direction. On energy efficiency, for example, it calls on Member States to set demanding targets for public buildings and both private and social housing and to make them subject to energy certification on a regular basis. To facilitate reaching their national targets, Member States should consider introducing a reduction of tax for energy-performing buildings. The Commission also calls on Member States and industry to urgently develop innovative mechanisms for financing building refurbishments (with repayments being made over several years based on energy savings).
How does the Commission propose to ensure that banks re-open credit lines for businesses?
It is very important that banks resume their normal role of providing liquidity and supporting investment in the real economy. Member States should use the major financial support provided to the banking sector to encourage a return to normal lending activities and to ensure that central interest rate cuts are passed on to borrowers.
This is primarily a matter for Member States. However, the Commission will take it into account when reviewing state aids to banks.
More generally, the Plan will help to create a climate of confidence which will encourage banks to return to normal lending activities.
Why does the Plan place so much responsibility on Member States? What is the Commission's role? Why does the Commission itself not do more?
Responsibility under the Recovery Plan is shared so that the Commission and all Member States play mutually reinforcing roles. No-one can tackle this crisis unilaterally. Coordination is the key.
Without the Commission's key contribution, there would have been no possibility of agreeing and implementing the measures taken to support banks. There would be no chance of coherently reforming Europe's financial markets. And there would be no way to implement a coordinated European Recovery Plan for the real economy.
The Commission must always be both a driving force and an "honest broker" acting in the common interest of all 27 Member States, large and small. In tackling the financial crisis, and now in implementing the Recovery Plan, the Commission's role is central and it is essentially fourfold.
First, the Commission drives agreement on measures to be taken at national level within a coordinated EU framework, to avoid one Member State's actions damaging others. For example, the Commission's input in cooperation with the French Presidency paved the way to the adoption at the 12 October euro area summit and at the15-16 October European Council of a bank rescue programme to which all Member States could sign up. The Commission is now proposing a Recovery Plan good for all 27 Member States and for Europe as a whole.
Second the Commission proposes modifications to EU law and budgets, and works with the European Parliament and Member States to adopt and implement those changes. It has recently made proposals on, for example, deposit guarantees, capital requirements, credit ratings agencies and in the context of the Strategic Energy Review. Under the Recovery Plan it will propose further measures on among other things structural funding, greener taxation and energy efficiency.
Third, the Commission monitors the implementation of both new measures and existing EU law to ensure that Member States meet their commitments and that a level playing field is maintained. In recent weeks it has approved key state aids in record time, sometimes within 24 hours.
Finally the Commission represents the EU as a whole in international negotiations, both in established fora like the WTO and the G8 and in specific crisis meetings like the Washington summit and those that will follow it.
But the Commission has only the powers attributed to it by Member States under the Treaties. The main legal and budgetary instruments for stimulating demand and employment are in the hands of the Member States. The Commission cannot replace their actions or attribute further funds to itself! Its own budget is of great strategic importance but at around 1% of EU GDP it is a tiny fraction of the EU public spending as a whole and around half the government budget of the Netherlands or one eighth that of France!
What is the link with the Lisbon Strategy for Growth and Jobs?
The Recovery Plan is an extensive reinforcement of the Lisbon Strategy for Growth and Jobs in both the short and longer-term. It is a comprehensive response to the current crisis, with measures to boost demand and protect citizens from unemployment complemented by measures to step up investment in strategic areas where jobs can be created now and which will also contribute to Europe's competitiveness and sustainable prosperity in the long-term.
This investment further reinforces the Lisbon Strategy's emphasis on increasing investment in research and development and innovation making Europe's economy knowledge-based.
What is more the Recovery Plan builds on the success of the Lisbon Strategy in reinforcing Europe's underlying competitiveness before this crisis. For example, the budgetary room for manoeuvre enjoyed by many Member States is partly a result of having implemented Lisbon measures – in this way, the euro area overall government deficit fell from nearly 3% in 2004 to 0.6% in 2007.
In addition, the instruments available under the Lisbon Strategy for evaluation by the Commission, peer monitoring (multilateral surveillance) by Member Sates and the adoption and enforcement of country specific recommendations by the Council will be crucial in ensuring that the coordinated national measures under the Recovery Plan are fully delivered, once Heads of State and Government have approved the Plan.
New Lisbon country specific recommendations will be proposed by the Commission on 16 December 2008 and endorsed by the Spring European Council. This, combined with the new Stability and Convergence programmes, means Member States will in effect agree collectively on what each needs to do individually to implement the Recovery Plan and will monitor each other's progress based on the Commission's input.
What is the role of the state aid rules in the Recovery Plan?
The EU's state aid rules have been modernised and improved in recent years. On the one hand Member States have a very wide range of measures at their disposal to grant aid targeted at improving Europe's competitiveness. On the other hand the rules ensure a level-playing field within the Single Market and avoid that individual Member States or companies enjoy an unfair competitive advantage compared to others. This is essential to avoid triggering a subsidy race which would both damage competitiveness and exacerbate the risk of company failure and unemployment over the medium-term.
The Recovery Plan announces that the Commission will put in place a simplification package, notably to speed up its state aid decision-making. Any state aid should be channelled through horizontal schemes designed to promote the Lisbon objectives, notably research, innovation, training, environmental protection and in particular clean technologies, transport and energy efficiency. The Commission will also temporarily authorise Member States to ease access to finance for companies through subsidised guarantees and loan subsidies for investments in products going beyond EU environmental standards.
What are the changes regarding social and cohesion funding?
The thrust of these changes is not to increase social and cohesion funding per se, but to accelerate or "front load" it. More money would be available earlier (up to €6.3 billion in 2009) and there will be correspondingly less to spend later on in the programming period.
This means that the money can be spent now when the need is greatest because of the downturn.
The danger is that, with national budgets currently under severe pressure, Member States may delay planned investments. With more Community funding available up front, they can increase the Community contribution to projects now, so allowing planned investments to go ahead (although the principle of co-financing must be maintained over the whole programming period, so Member States will have to pay a correspondingly larger share later on).
It may be possible to have 100% Community funding for some individual projects (again, as long as the principle of co-financing is maintained over the programming period as a whole).
The Commission has proposed alongside the Recovery Plan the necessary modifications to the Regulations on the European Regional Development Fund, the European Social Fund and the Cohesion Funds.
How will the Recovery Plan help to modernise Europe's infrastructure?
Apart from changes regarding cohesion funding (see previous question) the plan will step up infrastructure investments in a number of ways, including:
What is new in the plan for SMEs?
The plan aims to enhance access to financing for SMEs. The EIB has put together an overall package of loans to SMEs which will now reach 30 billion euros for the period 2008-2011. In addition, an additional 1 billion euros will be conferred by the EIB to the EIF for a mezzanine finance facility. The EIF will also accelerate the implementation of the financial instruments under the EU's Competitiveness and Innovation Programme.
Meanwhile, Member States should make full use of the recently reformed rules for granting state aid, particularly for SMEs. To assist them, the Commission will put in place a simplification package, notably to speed up its state aid decision making.
In addition to this, the Commission will make it temporarily easier for Member States to grant certain kinds of aid to SMEs (e.g. loans for investments in the manufacture of products complying early with, or going beyond, new Community standards which increase the level of environmental protection).
The Plan also contains very concrete, specific measures to reduce administrative burdens on business, promote their cash flow and help more people to become entrepreneurs.
These measures build on the proposed Small Business Act: They include:
What is the role of research in the plan?
The plan states that Member States should increase planned investments in R&D and innovation. While this might seem counter-intuitive, there are many examples in the past of countries (both inside and outside Europe) which have had the foresight to increase research spending in difficult economic times and have benefited economically as a result. Investments in R&D and innovation are medium to long-term oriented and contribute to strengthen the basis for rapid knowledge-based growth when economic conditions improve.
How much will the EU budget contribute to the Plan and how much will the European Investment Bank (EIB) contribute?
In 2009 there will be up to €14.4 billion from the EU budget in the form of €5 billion of additional funding for Energy Inter Connections and Broadband, €6.3 billion for advanced social and cohesion fund payments, €2.1 billion in total redeployed from existing budgets for green cars, energy efficient buildings and factories of the future and high-speed internet, and €0.5 billion of advanced funds for trans-European transport networks, as well as €0.5 billion for various other projects
Total additional intervention from the EIB will be €15.6 billion in 2009 with a similar figure in 2010.
EIB funding will also generate a positive leveraging of additional private investment.
The European Bank of Reconstruction and Development will also add €500 million a year to its current level of financing in new Member States.
How will the Recovery Plan benefit the car industry?
The Commission wants a viable and competitive car industry in Europe. The Recovery plan aims to protect jobs in this key sector and to ensure its long-term viability by encouraging sustainable reform that embraces new environmentally friendly technology and makes Europe's car manufacturers world leaders in an increasingly competitive market.
To begin with, the fiscal stimulus should in itself boost all Europe's industries, by directly increasing purchasing power and also by helping restore confidence – large purchases like cars are more dependent on confidence than most others.
In addition, the Plan emphasises the need to make sure that banks – especially those in receipt of state support - maintain and increase lending at affordable rates. This too will help small businesses and individuals make large purchases which require finance, including vehicles.
What is more several of the specific measures announced in the Commission proposal aim to help the car industry.
The Recovery Plan also aims to ensure a coordinated European response so that problems in one Member State are dealt with and not exported to others, for example through state aid with an unduly distorting effect.
What does it do for the construction sector?
What is the "factories of the future" initiative?
This is the third new partnership between public and private sectors proposed in the plan.
It has an estimated envelope of 1.2 billion euros.
The objective is to help EU manufacturers across sectors, in particular SMEs, to adapt to global competitive pressures by boosting their technological base.
The focus will be on the enabling technologies of the future, such as engineering technologies for adaptable machines and industrial processes, ICT, and advanced materials.
How does the Plan promote broadband?
The Commission and Member States should work with stakeholders to develop a broadband strategy to accelerate the upgrading and extension of networks.
The strategy will be supported by public funds in order to provide broadband access to under-served and high cost areas where the market cannot deliver. The aim should be to reach 100% coverage of high speed internet by 2010.
In addition, Member States should promote competitive investments in fibre networks and endorse the Commission's proposals to free up spectrum for wireless broadband.
What is the role of trade and development?
Keeping trade links and investment opportunities open is vital – because Europe's return to solid growth will depend on its capacity to export and because global recovery depends to a large extent on the performance of emerging and developing economies.
The EU will therefore maintain its commitment to open markets across the globe, keeping its own market as open as possible and insisting that third countries do the same.
It will seek early agreement on a global trade deal in the Doha Round. A successful conclusion to the Doha Round would boost recovery worldwide and the G20 Summit in Washington agreed to strive to reach a framework agreement paving the way for that by the end of this year. It will also create a network of ambitious free trade agreements with a range of partners.
It will seek more effective regulatory co-operation, including through the Transatlantic Economic Council.
The crisis will add to existing pressures on developing countries. So, it is all the more important that the EU, and others, maintain their commitments to achieving the Millennium Development Goals.
Is the financial market crisis over – is it only the real economy that matters now?
No. The extensive and ongoing action on financial markets at EU and global level is closely integrated in the Recovery Plan. If it is implemented fully across Europe, the Recovery Plan, by bolstering the real economy, will make a major contribution to restoring confidence and to putting the financial markets back on an even keel, thus boosting lending to businesses and individuals and turning a vicious cycle into a virtuous one.
Equally, if the Recovery Plan is to maximise effectiveness, Member States will need to ensure that banks, especially those receiving support under the European programme for supporting the banking sector, free up lending and ensure that interest rate cuts are passed on to borrowers.
The EU programme for recapitalising banks, guaranteeing customer deposits and inter-bank lending has stabilised the situation. The steps already taken and in the pipeline – for example on credit ratings agencies, capital requirements, derivatives and hedge funds - will provide further reassurance and help get financial markets back on their feet and at the service of depositors, policy holders and investors. The global agreement and international work effort agreed in Washington on 15 November is of key significance.
But the financial market situation remains precarious. The current threat to the real economy represents a "second round" threat to the financial markets, notably because if there were to be spiral of company failures and unemployment, that would lead to defaults on loans by both businesses and individuals. Such defaults would reduce banks' capacity to lend, exacerbate the credit crunch and in turn further damage the real economy.
The risk of worsening turmoil in both the real economy and in financial markets creating such a "negative feedback loop" is a key reason why the Commission Recovery Plan is necessary and urgent.