What Happened to Those Big-Spending Europeans?

Posted by: Carol Matlack on December 02

Continental Europe has long been known as the land of big-spending governments. But those governments are proving surprisingly stingy when it comes to doling out stimulus measures to aid the region’s shaky economy.

The latest evidence is likely to come on Dec. 4, when President Nicolas Sarkozy unveils his long-awaited stimulus package for France. Though Sarkozy has promised “very powerful” measures, he has already ruled out a major tax cut, and government spokesmen have said the cost of the package will be no more than $25 billion, just over 1% of France’s gross domestic product. Compare that with the more than $800 billion, or 6% of the economy, already doled out this year by the U.S. government, with hundreds of billions more expected to enter the pipeline soon.

A key feature of the Sarkozy plan, the newspaper Le Monde reported on Dec. 2, will be a $1,300 one-time payment to French drivers who junk their old cars. The idea, of course, is that they’ll quickly buy new cars, throwing a lifeline to automakers such as Renault and PSA Peugeot Citroën, who are laying off thousands of workers as their sales plunge.

The Sarkozy package also is likely to include increased spending on public works, and on job-training for the unemployed. Separately, his government has promised to make $50 billion available to recapitalize ailing French banks, although European Union regulators haven’t yet said whether they’ll approve the plan.

It adds up to a fairly modest effort. But compared to the Germans, the French look like spendthrifts. Chancellor Angela Merkel has held firm against a growing chorus of calls – from economists, business leaders, and even from some within her own party -- for tax cuts to boost anemic consumer spending. As for pouring money into public works or other projects, Merkel has said she doesn’t want to join other governments in a “race for billions” in stimulus aid.

What’s holding the Europeans back? Fear of inflation, for one thing – although the latest figures show inflation fell to 2.1% in November, down sharply from 3.2% in October. Budget deficits are another worry. France is one of several countries that has battled to curb government spending to meet budget-deficit targets in the eurozone growth and stability pact.

Unlike their neighbors on the Continent, the British have moved vigorously on the stimulus front. Prime Minister Gordon Brown’s government has already slashed the value-added tax from 17.5% to 15%, while ponying up more than $400 billion to shore up troubled banks.

Which approach is right? Many economists say that the cautious Continental governments are making a mistake. By dribbling out aid too slowly, they could allow the current economic downturn to pick up momentum that would be harder, and costlier, to reverse later.