ANNUAL REPORT 2008 - Polymer Bank Notes of the World

Council. The effects of these interventions onpublic finances in the euro area are difficultto assess (see also Box 7). As at 1 January2009 the potential direct impact of announcedgovernment support to the banking sector oneuro area general government debt was estimatedat €284.6 billion (around 3% of euro area GDP),and on government contingent liabilities ataround 19%. The impact of these interventionson the euro area government deficit in 2008 wasestimated to be negligible.In response to the severe economic downturn,the European Council approved a EuropeanEconomic Recovery Plan in its meeting on11 and 12 December 2008. According to this plan,individual EU Member States will contribute€170 billion to a total fiscal stimulus of€200 billion (1.5% of EU GDP), with theremainder coming from the EU budget and theEuropean Investment Bank. This coordinatedeffort by the Member States is intended tosupport economic recovery by strengtheningaggregate demand and increasing efforts toimplement the structural reforms envisaged in theLisbon strategy. Depending on national circumstances,measures can take the form of increasedpublic spending, a reduction in tax burdens orsocial security contributions and aid to certaincategories of enterprises or households. At thesame time, the European Council confirmed itsfull commitment to the implementation of theStability and Growth Pact and to sustainablepublic finances. Member States were called onto return as soon as possible to their mediumtermbudgetary targets.Many euro area countries adopted fiscalmeasures to stimulate aggregate demand. Inthe autumn of 2008, the German governmentadopted a package of measures, mostly on therevenue side of the budget, amounting to 1.3%of GDP in 2009 and 2010. At the beginningof 2009, the government announced a secondstimulus package, accounting for about 2% ofGDP and consisting of additional measures inthe same two years. In France, measures worthsome 1.5% of GDP were announced at theend of 2008 for the period 2009-11, includingaccelerated public investment and support forsmall businesses and specific industries. In 2008the Italian government adopted expansionarymeasures, mostly focusing on the expenditureside, amounting to half a percentage pointof GDP for 2009 and 2010. Their impacton net borrowing is planned to be largelyoffset by compensating measures. In Spain, anumber of revenue measures to stimulate theeconomy were taken in the first half of 2008,and additional public investment plans wereannounced in November, representing morethan 3% of GDP in the period 2008-10. Mostother countries also adopted sizeable fiscalstimulus measures.While a deeper assessment of the stimuluspolicies will have to wait until the exact measuresand their implementation are known, it is clear thatcurrent government intentions pose some risks(see also Box 8). Rising deficits can undermineconfidence in fiscal sustainability, especiallysince the reversibility of the stimulus measuresis in many cases not addressed and may prove tobe very difficult. The sharp rise in governmentbond spreads vis-à-vis Germany is a warningsign that financial markets are watching theevolution of the potential risks very carefully.The effectiveness of the stimulus measuresis sometimes doubtful, as a wide range ofmeasures has been envisaged. Not all measuresare clearly linked to the root of the currenteconomic problems and some may reflectpolitical compromises rather than economicconsiderations. Government intervention alsocarries the risk of distorting the behaviour ofeconomic agents.74 ECBAnnual Report2008