Friday, 28 November 2008

EU stimulus package – for real?

According to many American pundits, the EU countries are late out of the starting blocks in terms of economic stimulus to counteract the economic downturn. Europe is – so the story goes – unable to agree and to act because of the decision structure of the EU itself.

The EU commission this week released the news that EU will introduce a package worth some €200bn aimed at stimulating the economic activity and that at least made it seem as if something is moving in Europe. Unfortunately, the design of the package will confirm the worst prejudices held by the Americans.

Presented as a major new initative, the EU stimulus package amounts to some 1.5% of the area's total GDP. In terms of stimulus to a world facing a rapidly contracting demand, it is underwhelming. But at least it comes on top of what the individual member states have already put into place or agreed to? Here's the catch: EU's stimulus package contains no new initiatives. It is simply a listing of the initiatives by the member states, nicely presented. It was even made clear that the package could be smaller if some of the member states decided that they could not afford to live up their own spending targets. In other words, a total hoax, proving that the US is always faster, nimbler, smarter, when it comes to economic decisions.

Think again. We have heard of the TARP of $700bn, then some extra $150bn was introduced for other purposes and last week another rescue program of $800bn was presented. Now those are real numbers instead of the scrawny €200bn ($230bn) the Europeans can come up with. And the money is already being spent.

However plausible this may sound, there are a number of misconceptions to clear away. The US rescue packets are not stimulus programs. They are asset swaps. Uncle Sam doles out some money and receives something in return. Money is given to the banks, and equity stakes are received in return. Or packages of mortgage debt. Or anything really that looks slightly iffy. It may well be that the assets received may end up worthless, but the point is that it is all an exercise in balance sheet manipulation. Various US government institutions, lead by the Fed, are simply boosting their balance sheets, swapping one type of assets for another. Given the quality of the assets received, some losses may be taken, but others (bank shareholdings) may indeed turn profitable with time. There is some symmetry to that. The US banking sector is reducing the balance sheets, so the government is boosting the public sector balance sheets. But for now, these programs do not require immediate financing.

Europeans have not been stingy on this front. The total of European asset swap programs exceeds €1800bn, or at least that is what the governments have committed themselves to as a provisional upper limit. In this respect, it is perfectly sane to say that the Europeans have in fact acted with more punch than the friends stateside. It also appears that the Europeans programmes are more thoroughly thought out. So far, the US rescue effort has been an exercise in changing priorities every two weeks or so. It is the result of the US administration constantly being behind the curve in realising where a fire will break out next. The most recent €800bn package is aimed to help credit card debt, student loans, and car loans. Exactly as many observers had pointed out would be necessary. Those loan types were not considered when the TARP was introduced little more than a month ago. Less friendly observers might be less merciful and claim that the rescue action has been run in a totally headless manner.

Of course the various asset swap programs may at the end prove costly to the taxpayers and could entail tax increases in the medium term. However, that is not our concerns here. The important thing to understand is that these programmes were designed specifically to keep the financial systems afloat. Trying to get the economies going is a different issue, and it will have to be resolved by increasing demand. And that is what the economic stimulus packages will be about.

Even if stimulus packages always take some time to put in place, and even if the EU package is nothing but a collection of already decided initiatives, put through a word processor and given a nice layout, it is still a sign that the European countries are doing something. As an example, Spain released details of its programme earlier today.

President-elect Obama has already indicated that he wants a stimulus package of $250bn ready for when he takes office on 20 January. His newly appointed economic team is supposedly already working on it. Given the depth of the problems in the US economy, $250bn will not be anywhere enough and there will be more programmes coming on stream. But the fact is that market talk about the Europeans falling behind the curve is simply not true.

No comments: