Bank Bailouts Could Dwarf Stimulus Plans
An annual report on public finances published by the European Commission on Tuesday (23 June) indicates the cost of government stimulus packages could pale into insignificance when compared to the bill for EU bank bail-outs.
The lengthy report says the final cost of bank bail-outs is likely to lie anywhere between 2.75—16.5 percent of EU GDP depending on the veracity of underlying assumptions and the ability of governments to recover capital injections and loans.
"Experience shows that the costs were lower when the banking crisis resolution strategy was implemented swiftly, was transparent and received broad political support," said a commission statement.
A final bill closer to the report's upper estimate would dwarf the costs of stimulus spending used by EU governments to tackle the economic crisis.
EU governments will provide roughly five percent of GDP, or around €600 billion, to stimulate the bloc's economy and protect its citizens over 2009-10 when the rising cost of unemployment benefits and other automatic support measures are taken into account.
This year, the largest fiscal stimulus packages as a percentage of GDP are being implemented in Spain, Austria, Finland, the UK, Germany and Sweden.
However the report warns that the heavy toll exacted on public finances as a result of the crisis and the growing burden presented by an aging EU population mean governments increasingly need to claw back spending and put their financial houses in order.
"An exit strategy strengthening fiscal policy frameworks, reforming age-related spending and spelling out the broad consolidation measures ... is required to address these concerns," said the commission.
Germany recently introduced a constitutional change that will make it illegal for the federal government to run a deficit of more than 0.35 percent of GDP from 2016, whereas the French president, Nicolas Sarkozy, rejected austerity measures in a speech to parliament on Monday.
Slowdown in EU recoveryMr. Sarkozy's warning that continued spending was necessary because the downturn was far from over was partially confirmed by a new survey on Tuesday that indicates the EU's recovery appears to have slowed in the second quarter of this year.
The purchasing managers index published by Markit Economics was largely dragged down by a June contraction in the services sector.
The preliminary PMI figures—an important indication of private sector activity - rose only slightly to a nine-month high of 44.4 in June from 44.0 in May, below the expectations of many economists.
A score below 50 indicates a contraction in activity, with June's figures indicating activity has fallen for 13 consecutive months, the longest period of contraction in the survey's 11-year history.