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European Leaders Propose Small Stimulus Package

I mentioned earlier that the “Big 4” leaders – of Germany, France, Italy and Spain – were meeting today in advance of a big EU summit next week. That meeting has adjourned, and the leaders announced they would push for a stimulus package of 130 billion euros. But even the initial reports of this shows less than meets the eye:

Mr. Hollande had presented a growth pact of about 1 percent of European gross domestic product, which is between 120 billion euros and 130 billion euros, he said. He had vowed during his campaign to alter a fiscal treaty to include growth measures, but this package seemed to suffice.

In Rome, Ms. Merkel said that the four had agreed on such a growth pact. But there is little new money in the pact, which mostly redirects existing funds, though it also creates so-called “project bonds,” whereby the euro zone will provide credit to private companies for infrastructure projects and job-creation.

“We want a significant European growth package, that is worth about 1 percent of G.D.P., or 130 billion euros,” Mr. Monti said. “Growth can only have solid roots if there is fiscal discipline, but fiscal discipline can be maintained only if there is growth and job creation,” he said.

The big four would still need buy-in from the rest of the EU ministers to get this done. Agence France-Presse describes this as “up to” 130 billion euros, by the way. And even if this were new stimulus dollars, you’re talking about 1.4% of GDP, as Matthew Yglesias points out. That’s not really enough to make a big difference.

Nonetheless, this does represent some shift, from an austerity-only policy, to a mostly-austerity-and-a-bit-of-stimulus policy. Given the vociferous resistance to this among most Eurozone leaders, that’s significant. And I think the slippage in the German economy has something to do with that. But for a true shift to a policy that works, you would need to take out the big bazookas at the European Central Bank, to create the kind of size to counteract the austerity and put the Eurozone back on a growth path.

Meanwhile, the big four did not commit to eurobonds, which would reduce borrowing costs to the more struggling banks. French President Francois Hollande vowed to continue pushing for it. The big four also committed to a financial transaction tax, which if agreed to in Europe could spur changes over in the US. Banking and fiscal integration was also discussed, but there aren’t any definitive points of agreement on that.

Maybe now the focus will swing back to Greece, whose new government is getting off to an inauspicious start from the perspective of their creditors. They have vowed not to impose new layoffs in its public sector, making it more impossible to meet the budget targets required under the bailout. The new government claims to want a renegotiation, but their position is untenable. Even a renegotiation will not give them the space they need, given the disastrous state of the economy. The possibility of an exit is nowhere nearly out of the realm of possibility, and the attendant contagion that could result. That would require more than a stimulus package of 1% of GDP.

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David Dayen

David Dayen