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The European economy is in the midst of the deepest recession since the 1930s, with real GDP projected to shrink by some 4% in 2009, the sharpest contraction in the history of the European Union. Although signs of improvement have appeared recently, recovery remains uncertain and fragile.
A swift and decisive EU response:
Aside from intervention to stabilise, restore and reform the banking sector, the European Economic Recovery Plan (EERP) was launched in December 2008 to restore confidence and bolster demand through a coordinated injection of purchasing power. The overall fiscal stimulus, including the effects of automatic stabilisers, amounts to 5% of GDP in the EU.
But policies must take up new challenges:
To ensure that the recovery takes hold and to maintain the EU’s growth potential in the long-run, the focus must increasingly shift from short-term demand management to supply-side structural measures. Failing to do so could impede restructuring or be harmful to the Internal Market. Moreover, while clearly necessary, the bold fiscal stimulus comes at a cost. On the current course, public debt in the euro area is projected to reach 100% of GDP by 2014. The Stability and Growth Pact provides the flexibility for the necessary fiscal stimulus in this severe downturn, but consolidation is inevitable once the recovery is firm.
A coordinated 'exit strategy' is essential:
Preparing a coordinated exit strategy now, not only for fiscal stimulus, but also for government support for the financial sector and hard-hit industries, will enhance the effectiveness of these measures in the short term, as this depends upon clarity regarding their eventual withdrawal. The strategy must be comprehensive and ready to be implemented as soon as recovery is firm. In the financial sector, government guarantees and holdings in financial institutions will need to be gradually unwound as the private sector gains strength, while carefully balancing financial stability with competition considerations.
The exit strategy should also ensure that Europe maintains its place at the frontier of the low-carbon revolution by investing in renewable energies, low carbon technologies and 'green' infrastructure.
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