The Search for Eurozone Growth
By Tony Connelly, RTE Europe Editor, in Brussels
Now everyone is singing from the growth hymn sheet, but not everyone is singing the same tune.
At one end of the pew are those that say austerity should be tossed away as soon as possible, at the other those who insist growth will only come AFTER sound public finances have been restored.
Bunched in the middle are the majority, including Chancellor Merkel and the Irish government, who say growth and fiscal consolidation (read austerity) are two sides of the same coin.
Since Europe can’t pump in a massive stimulus package the way the US Fed might, what are people talking about when they talk about growth?
There are a number of ideas, but looked at critically they appear to be a synthesis of existing proposals and may not produce the bang-for-buck the eurozone economy needs.
They’re also subject to the typically conflicting agendas of national capitals and EU institutions.
Speaking on Europe Day during a debate sponsored by the German radio station WDR, the European Commission president Jose Manuel Barroso said that a consensus had been more or less reached on Project Bonds.
What are these?
They were first proposed by Mr Barroso back in September 2010 and were raised again during the March summit of EU leaders. They are bonds to boost investment in energy, transport and the digital economy. In fact, it was even earlier – in January 2009 – that the Commission suggested using €5 billion of unspent EU money in these and other sectors, notably those related to climate change.
How would they work?
The Commission argues there are gaps in trans-European infrastructure, in other words, in energy networks, in transport and in broadband. The idea would be that a pot of money – as of last October the Commission was thinking not of €5 billion but €50 billion – could be leveraged to start spending on these infrastructure projects soon.
That would be done with the European Investment Bank (EIB) and private capital, with third-party investors being lured in through lowered risk. The dream, from the Commission’s point of view, is that it would create jobs, lead to greener transport networks (since networks normally built along national lines would be done more logically and spatially at EU-level), and would enhance the single market.
A pilot Project Bond initiative was to have been launched for 2012-2013 using unallocated funds from the outgoing EU budgetary cycle 2006-2013, but the main funding would come from the next EU multi-annual budget which will run from 2014-2020.
But already problems are apparent.
The Project Bonds idea is linked with the European Investment Bank (EIB). Already Olli Rehn, the European Commissioner for Economic Affairs, has suggested that a €10 billion increase in contributions from member states to the EIB could leverage as much as €60 billion and this could rise to €100 billion if combined with guarantees from the EU budget 2014-2020. That could then lead to a wider roll-out of Project Bonds.
According to one reading, though, the EIB is extremely jealous of its Triple A rating and won’t want to take on too much risk. Also, as Daniel Gros from the Centre for European Policy Studies points out, the EIB only lends against government guarantees “whereas fiscally stress sovereign [governments] cannot afford further burdens.”
Gros also points out that infrastructure projects are better off done not in poorer member states, where infrastructure has improved in recent years, but in Germany, where the autobahns are getting crowded. Since Germany can borrow at a cost of next to nothing it could even attract in unemployed Spanish, or indeed Irish, construction workers. But the problem there, he points out grimly, is that new transport projects take years to complete and can run into dense, local opposition (the Stuttgart high-speed rail link is a case in point).
The other problem is that if Project Bonds are to go ahead they’ll need to pilfer structural funds or cohesion funds from the EU 2014-2020 budget, but that is already the subject of much sabre-rattling from the UK, the Netherlands and Sweden who want to cut spending at EU level, not increase it.
Elsewhere, the Commission is still pushing the idea that any spending of structural funds should be linked to areas within each member states where bottlenecks to the single market – in those areas like transport, energy and digital infrastructure – as foreseen under the European Semester, one of the new monitoring elements of recent crisis-related rules.
Both Brussels and Berlin are also pushing for the implementation of structural reforms as also foreseen in the new rules. These are designed to open up protected professions such as legal, medical and haulage sectors, where the closed shop is a hindrance to economic growth.
Taken in the round, however, it’s by no means clear that what is being called the Growth Compact (as complementary to the Fiscal Compact) will make that much difference. “The existing EU funds would be too small to make a difference, particularly in larger economies, and structural reforms usually take years before their positive impact can be seen,” says Sebastian Dullien from the European Council on Foreign Relations.
Dullien recommends instead that countries with huge deficits, like Spain, be given a longer period to get their deficits to 3pc of GDP and thus take the pressure off unemployment.
Another idea would be to strip out public investment expenditure from the normal budgetary calculations so it doesn’t show up on the deficit. In turn the EIB could borrow on the international markets for governments to make those capital investments, and goverments would repay the money and the ancillary costs. But getting the EIB to sign up to such an idea seems unlikely in the short term.
Can Francois Hollande inject some new thinking into the mix?
Probably not a lot. The French president-elect has spoken of growth along the lines we’ve been looking at, ie the EIB, project bonds, and structural funds – and also a new Financial Transaction Tax (FTT). But that idea has already been shot down by, among others, the UK and Ireland, unless such a tax is agreed globally.
Hollande will meet Angela Merkel on May 16. At that point he may spell out in more detail what he wants on growth, and how it will be hooked on to the Fiscal Treaty.
In the meantime, the search for growth continues…