Green Islands in Sea of Old-Style Stimulus in

UNCLAS SECTION 01 OF 02 VIENNA 000272 SIPDIS SENSITIVE TREASURY FOR FTAT, OCC/SIEGEL, AND OASIA/ICB/ATUKORALA TREASURY PASS FEDERAL RESERVE, FINCEN, AND SEC/JACOBS E.O. 12958: N/A TAGS: ECON EFIN SENV KGHG AU SUBJECT: Green Islands in Sea of Old-Style Stimulus in Austria REF: (A) Vienna 54; (B) 08 Vienna 1571 ¶1. (U) SUMMARY: The GoA has adopted economic stimulus measures totaling EUR 5.7 billion (c. 2% of GDP, above the EU benchmark of 1.5%/GDP). About one in ten Euros of new spending will be on "green" projects -- mostly energy efficient building retrofits. Even that modest sum still puts Austria in Europe's vanguard, since less than 2% of EU-wide stimulus spending is allocated for green measures. END SUMMARY. EUR 2.9 Billion In Spending, 2.3 Billion In Tax Cuts - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶2. (U) The GoA was an early mover in this crisis, passing stimulus packages in October and December 2008 (before the EU's "European Economic Recovery Program"): -- the October 28 "Stimulus Package I" (EUR 1 billion) contained mainly guarantees for SMEs/Small and Medium Enterprises -- the December "Stimulus Package II" (EUR 1.9 billion) will fund primarily infrastructure ¶3. (U) The GoA has agreed in principle on a tax reform to be adopted by April including EUR 2.3 billion of tax cuts and EUR 500 million of transfer payments to families (septel to follow). NOTE: The GoA counts all three stimulus packages (EUR 5.7 billion) as part of the European Economic Recovery Program, and Chancellor Faymann has called Austria's stimulus the "second largest" in the EU. It will not be Europe's fastest though: a significant part consists of loan guarantees (which hinge on outside lending) and many infrastructure projects will not be implemented until at least 2010 -- END NOTE. Details on Stimulus Spending - - - - - - - - - - - - - - - ¶4. (U) The EUR 1 billion "Stimulus Package I" (adopted by Parliament October 28) was an early attempt to stabilize the Austrian economy through loans and loan guarantees for Small and Medium Sized Enterprises (SMEs): -- EUR 170 million will go for investment credits (including micro-credits) through AWS, an Austrian government investment agency; -- EUR 200 million in loans will be issued through the European Investment Bank (EIB),including EUR 100 million for SMEs and EUR 100 million for research/development; -- EUR 100 million will be funneled through the German KfW Group (Bank for Reconstruction),earmarked for environmental technology, energy efficiency, and waste reduction projects; -- the GoA will guarantee EUR 400 million of AWS loans to SMEs to stimulate new lending by commercial banks; and -- a EUR 80 million fund will be created through AWS, where SMEs can apply for equity investments. Only about EUR 100 million of this first package will be funded in the 2009 budget (according to MinFin),meaning the impact will be felt mainly in 2010. ¶5. (U) The GoA's EUR 1.9 billion "Stimulus Package II" (adopted by the cabinet on December 23; no parliamentary vote needed for most items) is mainly for infrastructure. The package includes: -- EUR 875 million for new construction (public offices and schools/universities) and energy-efficient renovations; -- EUR 570 million to subsidize faster depreciation by private enterprises (to promote replacement of old equipment); - EUR 100 million for "thermal renovation" of private buildings (EUR 50 million for households, 50 million for companies); - EUR 150 million for a "Regional Job Creation Initiative" (EUR 80 million for business projects that create new jobs, and EUR 70 million to re-train the unemployed); - EUR 100 million for Research/Development (including EUR 33 million for business-related research and 17 million to modernize university equipment); and - EUR 140 million to finance an obligatory pre-school kindergarten year for all children (COMMENT: it is VIENNA 00000272 002 OF 002 unclear why the GoA counts this as a stimulus measure). 5-11% For Green Business - - - - - - - - - - - - - ¶6. (SBU) Like most EU crisis spending, Austrian "stimulus" measures tend to be subsidies for established industries and favored sectors (such as SME's) or are simply popular measures by a different name -- such as the free kindergarten year. Even with Austria's early start, the money will flow mostly in 2010: the Federal Real Estate Company (which will administer most of the government's construction program) has too few projects in the pipeline now to ramp up spending quickly. ¶7. (U) In our analysis, about a tenth of new GoA spending can be labeled "green" stimulus: EUR 200 million in environmental technology projects and efficiency retrofits, plus another EUR 120 million (NOTE: Post estimate) of new spending on public building renovation and research projects. This accounts for about 11% of GoA stimulus spending. If we add tax cuts to the baseline (which the GoA itself does),the "green" slice of the stimulus pie falls to 5-6%. Still, this is well ahead of the EU pack: a February analysis by Belgian think-tank Bruegel (reported in EU Observer/February 9) found that less than 2% of EU-wide stimulus spending will go for "green" projects. KILNER