Europe contemplates (tiny, possibly nonexistent) stimulus

Psychedelic stimulus! (Getty Images)

Today's thrilling, market-juicing news out of Europe is that Germany, Italy, France and Spain are all going to push for a $164 billion stimulus package to boost the euro zone's ailing economy:

Leaders of the eurozone’s four largest economies pledged on Friday to back a €130bn growth package and defend the common currency but remained divided over the credit crisis as Germany continued to resist proposals to issue common debt and use bailout funds to stabilise financial markets.

Will this do much good? In theory, an economic jolt could help some troubled euro zone countries, such as Spain and Italy, grow their way out of their high debt burdens. (One way to shrivel your debt-to-GDP ratio, after all, is to make that denominator bigger.) According to analysts at ING, a stimulus worth 1 percent of Europe's GDP — roughly the size of the package being contemplated above — could, if done right, boost growth in periphery countries such as Spain and Italy by 1 to 2 percent. That's not nothing. And it beats the ongoing recession in Europe.

But it all depends on the details — which remain murky. This new stimulus package may not actually be as big as advertised. When French President Francois Hollande first proposed his growth package, he envisioned core countries such as France and Germany putting up a mere $12 billion (€10 billion) in new money and channeling it into an investment bank that would somehow magically attract new private capital for infrastructure projects.

Many observers are skeptical this will work. "No one has ever explained how €10 billion becomes €60 billion," one EU diplomat told the Telegraph back in June. "This is funny money." We're still waiting for details on this latest stimulus package from Germany et al. More funny money? Or an actual stimulus bill?

Also worth noting that Europe's leaders are still very much divided on how to backstop the debts of countries like Spain and Italy. That's a key part of any "master plan" to save Europe. Here's the FT:

At a joint press conference Angela Merkel, German chancellor, declined to endorse affirmations by all three of her co-heads of government – Italy’s Mario Monti, François Hollande of France and Spain’s Mariano Rajoy – of the need to use the eurozone’s bailout funds to “stabilise financial markets”.

Awkward!

Related:

From Krugmania to Draghia: Five ways to save the euro zone

The five possible parts of a "master plan" to save the euro

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Suzy Khimm · June 22, 2012