EcoFin comes to town
by Economics Correspondent Seán Whelan
Dublin Castle is the venue for this week’s meeting of EU Finance and Economics Ministers, along with Commissioners Olli Rehn and Michel Barnier, and the governors of the euro zone’s central banks.
Fresh from its exertions over Cyprus – and needing some R&R before turning to (or is that on) Slovenia – the Eurogroup is coming to town on Friday morning. Accompanied by its bigger and slightly richer cousin, the Ecofin, and the governing council of the ECB, and two big-time Commissioners, the whole EU financial and economic bandwagon will roll into Dublin castle for two days of meetings. No doubt it will bump up the statistics for “The Gathering”, but what else will it do?
The first point to make is that this weekend’s meeting is an “informal” – that is to say, it’s not a decision making meeting. And that’s a good thing, because it takes pressure off the delegations to crack out the business on the agenda, and allows more time to look over the horizon, and kick ideas around. And it’s an opportunity for ministers and top officials to get to know each other a bit better, share political woes and talk to each other, rather than at each other.
But such gatherings are also good opportunities for doing side deals between ministers, commissioners and central bankers, and they have often been a launch pad for ideas and plans that rapidly make it into the “formal” meeting rounds and thence into actual policy or law. So watch out for someone touting a new idea that suddenly attracts “consensus”.
And despite its name, there are formal themes for the ECOFIN (that is the group of Economic and Finance Ministers) meetings working sessions on Friday afternoon and Saturday morning. One that is particularly dear to the Irish presidency is the development of alternatives to the banks as sources of funding. And funding is key to boosting economic growth.
The growth issue is obviously the most important thing that everyone involved in the management of economic and financial policy should be talking about. Although the baseline scenario for the European Commission and the ECB is that growth should have restarted in the EU by the end of the year, it is by no means certain it will. So policy makers need to do what they can to maximise the chances of growth returning, and returning in a durable way.
One thing that might help in that regard is long term financing for investment. A Commission discussion paper launched two weeks ago looked at the supply of long term financing in Europe. It is the main item for discussion on Saturday morning, and its aim is to develop the market for non-bank financing in Europe.
The commission defines long term financing as spending that enhances the productive and industrial capacity of the economy. That covers a wide range of tangible assets, such as energy, transport and telecommunications infrastructure, housing and climate change eco-innovation technologies, and intangible assets like education, research and development. Great, but where’s the cash coming from?
Governments are heavily indebted and are all cutting back. The corporate sector is facing lower demand which undermines its capacity for self-generated investment. Households – believe it or not – are the biggest source of finance for investment, but folks like us prefer our money easy to get at, rather than locked up in long term savings products. And foreign direct investment (FDI) is too volatile to rely on for long term projects.
As for the banks, well they may be the traditional source of finance in Europe (around 85% of finance flow though them in Europe), but they are massively in hock to the over-indebted governments. The Commission says EU banks will get state aid amounting to 36.7% of GDP (about €4.5 trillion). Around €1.5 trillion, or 13.1% of GDP, has already been spent on bailing out the banks of the European Union.
So if all the usual sources of finance are bust, or too scared to lend, where is the money going to come from? One suggestion from the Commission is new banks – national and multilateral development banks.
These would be state owned national or multinational development banks that would complement the existing financial system by focussing on long term investments and (hopefully) sparking interest from existing financial sources.
One of those sources is the pension and insurance industry, which has long term liabilities to investors, so is in theory better suited to long term investments of the sort development banks would pioneer. The good thing about the life and pension industry is that they already hold assets worth an estimated €13.8 trillion – or 100% of EU GDP.
In its plans for a new single market act, the commission is already looking at ways to pool and diversify risk for investors in long term projects, to make such investments more attractive.
It is also looking at whether the bond markets could be used – over the longer term – for long term financing. Project Bonds – providing financing for specific projects backed by EU guarantees of creditworthiness, are already in development on a pilot basis, but more may be possible.
Another approach – potentially controversially in light of the US sub prime crisis – is the development of securitisation markets – that is packaging up bundles of loans and selling them on to investors. This could be quite attractive for Dublin’s IFSC, a globally significant centre for securitisation already. But as the Commission says, such a development would have to be “subject to adequate oversight and data transparency”.
Finally it is looking for stakeholder views on issues such as the role of equity in financing, and the impact that taxation policy has on finance. For example, in most EU states the tax code tends to favour debt over equity, creating an incentive for high levels of leverage in firms.
And it notes that the taxation of saving reduces the amount of savings in the economy, thereby influencing investment and capital allocation.
It looks like the Commission is out to restructure the savings, taxation, bond and investment industries in Europe, to shake out the cash that does exist, and channel it into productive, long term investment. Sounds just like the sort of the thing ministers should be talking about in Dublin Castle and over dinner in the Royal Hospital Kilmainham.