The Wall Street Journal-20080206-Politics - Economics- As Slowdown Hits Europe- Stimulus Plans Considered

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Politics & Economics: As Slowdown Hits Europe, Stimulus Plans Considered

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The slowing U.S. economy and continuing credit squeeze is beginning to bear down harder on European economies, prompting the Spanish government to rush out a rescue plan for a key industry and sparking speculation that the German and British governments might act as well.

A building boom that had driven Spain's robust economic growth for a decade hit a ceiling last year. Though details of the Spanish plan haven't been set, officials said it is likely to include a program to employ construction workers in other industries.

"This is an issue that needs to be dealt with soon," a Spanish Labor Ministry spokeswoman said yesterday. She said ministry officials were talking with trade unions and employers about ways to stanch rising unemployment.

The Purchasing Managers Index for Spain's services sector, released by British research group NTC Economics, fell below the 50-point level that reflects a shrinking sector, dropping to a nine-year low of 44.2. That follows a 2.4% slump in Spanish industrial production in December and a surge in unemployment after a record 132,378 people, mainly from construction-related industries, filed jobless claims in January.

The slowdown in home prices isn't hitting Europe uniformly, but once highflying markets in Spain, Ireland and the United Kingdom are slumping.

Spanish house prices have fallen 3.1% from their peak in July, property Web site Facilisimo.com reported this week, while Irish house prices dropped 7.3% last year after an 11.8% rise in 2006, according to the Economic & Social Research Institute and Permanent TSB.

Most measures show that British house prices started sliding late last year, and Bank of England data show that mortgage approvals fell in December to their lowest since 1999, signaling demand could weaken further.

Spain, which had a 2007 budget surplus equal to about 2% of gross domestic product, is early in formulating fiscal-stimulus plans to shore up the economy, but other European governments are considering similar moves. In the U.S., Congress, with the blessing of President Bush, is moving swiftly to approve a stimulus package totaling at least $150 billion, mainly in tax cuts for households and businesses.

Britain's Chancellor of the Exchequer told bankers Monday that the British government would make the decisions needed in time for its March budget to "ensure the stability of the economy, to raise growth" and manage public finances. His remarks came as financial markets awaited tomorrow's interest-rate decision by the Bank of England, which is widely expected to cut rates again by 0.25 percentage point in response to slowing growth and credit strains in the British banking system.

"Fiscal policy will continue to support monetary policy," Chancellor Alistair Darling said, explaining that the government has the flexibility it needs to help. "We have low debt and historically low interest rates. We are able to do what is right to support growth in these uncertain times."

German Chancellor Angela Merkel's Christian Democratic Union party yesterday confirmed that her party's tax experts were looking at the possibility of reducing income taxes on low-wage earners after the 2009 elections.

Meanwhile, German Deputy Finance Minister Thomas Mirow told reporters in Berlin that the government didn't see the need for a fiscal-stimulus package because of continued economic growth. "However, export growth has slowed and private demand is certainly not as strong as we wished for," he said.

Despite the euro zone's economic slowdown, inflation in the bloc has accelerated, hitting a year-to-year record of 3.2%.

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Nicholas Winning contributed to this article.