But can Europe deliver? The obstacles are daunting. The fiscal room for manoeuvre varies greatly among the member states. The political weights attached to a fiscal stimulus and to fiscal sustainability clearly differ among the core countries, France and Germany in particular. The high degree of economic integration implies strong incentives to free-ride. Reaching a differentiated agreement on who does what could take months if not years, while the urgency is to act now. We therefore propose a three-part European recovery programme.

First, EU member states would all pledge to implement the same quantum of fiscal stimulus next year so that the burden of supporting the recovery would be shared equally. Specifically, we propose that all European countries deliver a boost amounting to 1 per cent of gross domestic product in 2009. This is at the high end of the range of the German budgetary stimulus proposed last week by its Council of Economic Experts. Although it may not be ideal for all countries, it is better for everyone to ensure that all of Europe is on board. In order to send a co-ordinated and unambiguous signal and to ensure that the boost is timely and effective, we advocate that a portion of the stimulus be delivered through a uniform 1 percentage point cut in value added tax rates on January 1 2009. VAT is not the best possible instrument to support growth, but it is the one Europeans can implement jointly. The remainder of the fiscal boost could be delivered through measures tailored to country-specific circumstances, such as relief for the working poor and incentives to improve carbon dioxide efficiency.

Second, this budgetary boost needs to be accompanied by an agreement to strengthen the EU's fiscal framework. The fall in tax revenues and increase in spending during thedownturn, plus the additional fiscal boost we propose, will lead to a number of countries substantially exceeding the 3 per cent deficit limit of the stability and growth pact in 2009. While this would trigger an “excessive deficit procedure” by the EU, that process would start biting only in 2012. By then, countries that already have high structural deficits could be in hopeless budgetary situations. Government bond spreads, which have widened markedly in recent weeks, could reach alarming levels.