Thursday, December 4, 2008

Stimulus Here, There, and Everywhere

Flash: the ECB reduced its principal rate by 0.75% to 2.5%, the biggest single decrease in its history.

Meanwhile, Sarkozy announced a 26 billion euro (1.3% of GDP) stimulus plan, focused on investment. Slightly less than half of this will come in the form of various types of aid to firms (reduced corporate taxes, VAT rebates, research credits). The rest will be public investment, most of it to go into projects already planned but frozen for lack of funding.

The devil, of course, will be in the details. Crony capitalism is alive and well in France, and there is a large pile of cash under this Christmas tree. It could easily be misdirected. This is where it would be useful if France had potent legislative oversight, a functioning opposition, a vigilant press, and all those other accoutrements of a vibrant democracy. But, as Keynes said, in a crisis, even paying people to dig holes and fill them up again can be useful, so we await further developments. The new package will send the deficit soaring to over 4% of GDP, but apparently the Stability and Growth pact is a dead letter, even if the official trigger for suspension has not yet been hit. There is debate about the effects on the euro: see here and here.

ADDENDUM: More details on stimulus package.

1 comment:

Leo said...

I think there's not much of a debate.
As Eichengreen's arguments clearly show, Feldtein's scenario is just negated by facts.