Tag Archives: Economic Crisis

2009 EU Report on Public Finances

The new, 10th edition of the report Public Finances in EMU – 2009, has been published.

The report says that public finances in the EU have come under unprecedented stress as they play a central role in overcoming the financial and economic crisis.

The report summarizes the measures under the European Economic Recovery Programme (EERP). According to the report, automatic stabilizers due to larger government spending in the EU and particularly the more extensive social security systems than in the US, have contributed support to the EU economy.

The public debt-to-GDP ratio in the EU is expected to jump by 21 percentage points to 79.4% of GDP until 2010. The expected sharp budgetary deteriorations and increases in public expenditure-to-GDP ratios, in addition to pressures on many Member States’ public finances from rising age-related spending, will eventually require tough choices with a view to maintaining long-term sustainability.

The authors of the report believe that the Stability and Growth Pact contains the sufficient flexibility to cope with the unprecedented challenges of the crisis while at the same time providing a framework for future consolidation strategies.

The North Korean Nuclear Test and Its Implications for the EU

North Korea performed an underground nuclear blast test with approximate 20 kilotons  equivalent. The news has been somewhat underreported given its importance.

The UN Security Council condemned the test and called for possible new sanctions for North Korea. The Presidency of the European Union has also condemned the test, saying that it has undermined stability on the Korean peninsula and in the region and represents a threat to international peace and security.

That is the widely expected political reaction. More importantly, new analyses appear to tell us why this test is so worrying, what it means for countries in the region, and an old one reminds us what it may mean for the economic development (i.e. deepen the crisis).

Spring 2009 European Council Conclusions – Summary

The conclusions of the spring European Council session are quite encompassing. Below are the most important issues:

The economic crisis

The Council will assess and report to the European Council in June about the effectiveness of the measures taken as well as the overall situation regarding the stability and functioning of financial markets. The European Council believes that that the report from the High Level Group on financial supervision chaired by Jacques de Larosière is the basis for action in order to improve the regulation and supervision of financial institutions in the EU.

EU will present a joint position for the G20 Summit in London, insisting on
• giving priority to restoring the functioning of credit markets and facilitating the flow of lending to the economy;
• avoiding all form of protectionist measures;
• ensuring appropriate regulation and oversight of all financial markets;
• fighting with determination tax evasion, financial crime, money laundering and terrorist financing.

Energy and climate change

The European Council has decided to continue discussing its position for the Copenhagen Conference on climate change in June 2009.

European Neighbourhood Policy

The European Council has adopted a special declaration for the Eastern Partnership with view of the Eastern Partnership launching summit on 7 May 2009.

EU and US Differ on Fiscal Stimulus Plans

The forthcoming G20 meeting is expected to outline a new policy division between the US and EU on fiscal stimulus to counter the financial and economic crisis.

Mr. Jean-Claude Juncker, president of the eurogroup, said “The 16 euro area ministers agreed that recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis was not to our liking (…)Europe and the eurogroup have done what they needed to do.”

This contradicts to appeals by Barack Obama’s top economic adviser, Lawrence Summers, who said that the urgent need for a short-term increase in spending by governments temporarily overrides the longer-term goal of tackling the global imbalances.

The G20 meeting will be the arena of an indeed important debate, since some of the leading economists that predicted this economic crisis (the Nobel laureate Paul Krugman and Nouriel Roubini) say that we need a lot of fiscal stimulus, among other things.

Advising on policy measures from a scientific standpoint is easy; implementing policy measures being an elected politician is quite different. However, it may be useful to at least discuss different views, rather than not.

The EU Response to the Economic Crisis – Update

In the last few days a couple of events in the EU provide some clues to the EU approach to tackle the economic and financial crisis.

The most important clue is contained in the Competitiveness Council conclusions. The Key Issues Paper “Responding pro-actively to the economic downturn” includes Council positions on several issues. The Council stresses the necessity “to achieve an open, flexible and fully functioning internal market by removing existing barriers to fundamental freedoms and avoiding the creation of new ones”. This is probably the most important message, once again repeated with view of the external direction of the internal market: “open markets, both in the European Union and globally, are crucial to ensure growth and jobs.”

This is a really important aspect of the EU policies in tackling the crisis. If we are to believe the prevailing economic theory, it was indeed protectionism and market barriers that exacerbated the Great Depression.

The Council has also addressed the auto sector claims for a financial bail-out. There it calls for the EC and the EIB Group to prepare proposals for the Spring European Council as to how to limit the liquidity gap and improve the access to finance for the industry. Again, the Council stresses on “the need to refrain from protectionism and discriminatory measures in the global car market”.

Equally important are comments by the Commission president Barroso on ideas for EU-backed government debt, or a single EU bond. He said “I don’t think it is useful to make speculations over ideas that have no chance at all of being decided”.

Barroso also dismissed the idea of fast-tracking some EU member states into the euro zone, claiming it could destabilize it.

At the same time the ECB has lowered its key interest rate by 50 basis points to 1,5%. The ECB believes that both global and domestic demand will decline in 2009 but thereafter recover gradually.

A general assessment can be made that the EU institutions view this crisis as a serious threat to the EU economy, but not as a terminal threat. However, some economic experts believe that this is not the case, and that real hardships are ahead, demanding much stronger policy measures (see this piece by Eurointelligence, as well as a devastating report by Absolute Returns Parrtners called “Europe on the Ropes”).