Some of these are used for torture. Image: Presseurop, Tony Harrison

27 ways out of the crisis

In Europe, signs of recovery have encouraged governments to implement further measures to facilitate a return to growth. However, as Le Monde reports, Europe's 27 member states are unable to adopt a coordinated approach to "exit the crisis," and remain as divided as they were when the recession began a year ago.

Published on 23 October 2009 at 15:25
Some of these are used for torture. Image: Presseurop, Tony Harrison

"Exiting the crisis" is the economic catchphrase in vogue in Europe this autumn. With the notable exception of Poland, none of the countries of the EU — whether they be big, small, rich, poor, old, or new members states—have escaped the recession, and all of them entered the economic crisis at more or less the same time. Many of them have now been hit by spectacular increases in unemployment, which has failed to respond to the stimulus packages that have continued to deepen budget deficits across the continent. In the current context of a tentative return to stability, governments are preparing to "exit the crisis." But what exactly are they planning to do?

First and foremost, they intend to proceed with caution: the economy may no longer be in free fall, but to a large extent the emerging recovery has been prompted by temporary measures, like the scrappage schemes that have been established in several countries. Europe's leaders are wondering about the wisdom of interrupting the shock therapy administered to their economies, which might provoke yet another downturn, and there is no question of compromising national interests to facilitate policy in other member states. This every man for himself attitude will continue to prevail as it did a year ago, when each country responded with its own emergency measures to the financial crisis, and coordination is unlikely to play a significant role in the recovery strategies adopted by European partners—though the issue is on the agenda for discussions at the Brussels summit on 29 and 30 October. In short each country has its own views on the measures to be implemented, and on the schedules to be adopted both for the wind-up of stimulus packages and a return to compliance with the criteria of the stability pact.

Hares and tortoises

Countries like France, Britain and Spain, which are cautious about reducing the range of public spending options, are opposed to the withdrawal of stimulus measures next year. Others, like Germany, want to take advantage of more optimistic economic forecasts (1.2 % growth in 2010, prompted by a recovery in exports) to return to a more orthodox economic policy. The Christian-democrats and liberals of the new-centre right coalition are putting the finishing touches to a plan, which will lower corporate taxes as early as 2010, and reduce income taxes in 2011.

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In the UK, where third quarter figures published today show that the recession is continuing, the details of the government's economic policy and the agenda for its implementation will depend on the result of general elections, to be held before June 2010. If he remains in power, Prime Minister Gordon Brown has pledged to promote growth by injecting a further 30 billion pounds (33 billion euros) of public money into the economy.

Cutting public spending

The rate of VAT, which was reduced in response to recession, is scheduled to increase from 15% to 17.5 % on 1st January. However, Gordon Brown does not intend to tackle the task of reducing spending until 2011, while the Conservatives—if they are elected—have promised to take immediate action on this front. The country's budget deficit is expected to reach 12.4 % of GDP in 2009-2010.

The British Conservative Party is not the only advocate of a hair-shirt approach. In the Netherlands, Jan Peter Balkenende's centre-left government has warned that spending cuts will be more severe than at any time since the war. The planned austerity package will include two key measures: the full retirement age will be progressively increased to 67 (by 2025) and public spending will be reduce by 20%. The Dutch economy is expected to shrink by 5% while the percentage of the active population out of work is set to rise to 8% in a country that has had quasi-full employment in recent years.

Raising taxes to reduce the budget deficit

This is the option chosen by countries like Spain and Ireland with monumental budget deficits. José Luis Rodriguez Zapatero's socialist government which has been lowering income taxes since 2004 will now be forced to change tack and raise them in 2010. Spain is the eurozone country which has spent the most on stimulus packages, which have not succeeded in reining in runaway unemployment (18% of the active population) or relaunching the economy.

According to the IMF, Spain will be one of the few eurozone countries to remain in recession in 2010. The projected budget for 2010 includes increases in direct taxes and an even more significant hike in indirect taxes to counter the ever deepening deficit, which will stand at 10 % at the end of the year.

Confronted with a deficit that could reach 12% of GDP this year, the Irish government also plans to increase taxes on households, but it has been careful not to touch its 12.5% corporation tax rate, which has done much to attract foreign investment in recent years. The hope is that this investment will continue and that it will play a major role in the relaunch of the Irish economy. At the same time, the government has embarked on a major programme of spending cuts, which have reduced civil service salaries.

Reducing income taxes

Faced with a deficit, which marks the end of a series of budget surpluses in previous years, Fredrik Reinfeldt's Swedish centre-right government has announced that it will lower income taxes along with taxes on pensions, and reduce social security contributions for independent workers. If they are re-elected in 2012, the social democrats have pledged to introduce a package of measures to increase taxes: these include reintroducing the wealth tax, a new tax on high-cost dwellings, and an overall increase in income taxes.

PORTUGAL

Private wealth bounces as companies sag

Following a slump induced by the global financial crisis, private wealth in Portugal during the second quarter has gone into recovery, reports Público. The Bank of Portugal has announced that Portuguese private financial assets (cash, bank deposits, life insurance, stock investment) jumped to €208.4 bn at the end of June, compared to March where its stood at €203.5 bn. Not a huge blip, but a first positive indicator since early 2008. This upturn in private Portuguese finances “could be an important in helping the economy to recover”, enthuses Público. However, no such good news for Portuguese companies, whose results are even worse than they were in the same period of the past year. Operational results plummeted 33.6 %, compared to the same period in 2008.

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