Is the EU fiscal stimulus sufficient?
This post was written by Alan Matthews
Much of the recent comment on this blog has understandably focused on the specifically Irish angles in saving the banks and getting credit flowing again, getting on top of the government deficit and improving competitiveness. But any progress towards these goals in a purely Irish context will be set at naught if the global economy continues to head south. We thus have a vital interest in the success of the various stimulus packages intended to reverse, or at least reduce, the slide into global recession.
The IMF’s most recent World Economic Outlook update (published January 28th last) presented its third downward revision of its economic forecasts in just four months. It now projects global growth of just ½ per cent in 2009, with advanced economies expected to suffer their deepest recession since World War II. Collectively, advanced economies are expected to contract by 2 per cent in 2009 - the first annual contraction in the post-war period.
The importance of the external environment needs no underlining, even if there are very different views on how this will evolve. Garret Fitzgerald in his article in today’s Irish Times notes that the Department of Finance projections recently presented to the European Commission expected Irish output to fall by 4.5 per cent this year, while projecting growth during a subsequent 2010-2013 recovery at little over 2.5 per cent a year. He contrasts this with the ESRI December 2005 Medium-Term Review which examined the likely consequences for Ireland of a possible combined global credit crunch and Irish housing boom collapse, and which he argues foresaw a possible 5.5 percent growth rate during the recovery period (though I could not find this figure in the ESRI Review when I went to look for it). Garret opines that
“This suggests that, if the global economy does survive this crisis, we could end up better placed to resolve our borrowing problem than the Department of Finance expects”.
At the present time, Garret’s hopes for a healthy global economy look very optimistic. International trade, which is a key driver of economic activity for a small open economy such as the Irish one, is plummeting. The IMF estimates that (the value of) global merchandise exports fell by an extraordinary annualised 42 per cent in the three months to November 2008, in part because of difficulties in accessing trade finance. Against this background, the IMF warned that “Monetary and fiscal policies need to become even more supportive of aggregate demand and sustain this stance over the foreseeable future, while developing strategies to ensure long-term fiscal sustainability.”
A recent paper by two economists at Brueghel.org attempts to compare the size of the stimulus packages introduced by EU, US and China. Their methodology only counts impacts which will take effect in 2009, is designed to measure the active fiscal stimulus (and not the automatic stabilisers), and deliberately counts separately government-sponsored provision of extra credit to producers and consumers on the reasonable argument that its economic impact is not commensurate on a euro-for-euro basis with fiscal measures.
On their estimates, the fiscal stimulus breaks down as follows: for the US €199.6 billion or 1.8% of US GDP; for the EU, €112.5 billion or 0.9% of GDP, and for China €233.1 billion or 7.1% of GDP. The US figure is much lower than the headline figure in the Obama package because it only counts impacts which take effect in 2009. The EU figure is only just over half the promised €200 billion stimulus agreed at the December 2008 European Council meeting, although if government-sponsored credit provision is included the EU target of a stimulus of 1.2% of GDP would be reached even by the end of 2009. But the question is, is this a sufficient contribution from the EU on the fiscal side to support aggregate demand in the coming year?