Monday, April 30, 2012

Marshalling growth in Europe

If talking about growth could create economic growth then the eurozone would be flying right about now.

The latest in a long line of 'pro-growth' proposals for the eurozone looks to be the creation of a new ‘Marshall Plan’ to provide funding for investment projects in Europe. The plan, according to El Pais, is to attract €200bn in investment from the private sector to fund projects geared towards creating growth particularly in infrastructure, green energy and high technology.

Currently, there are few details on the plan available but the main mechanisms for achieving the funding seems to be:

-          Increase the European Investment Bank capital by €10bn, which it is claimed would boost the lending capacity by €60bn and overall investments by €180bn (we assume by some sort of match funding with the private sector or other public funding)
-          Use the remaining €11.5bn in the European Financial Stability Mechanism (EFSM) as initial capital to be leveraged in the private sector (again in a similar way to above)

Clearly, this would be an EU scheme rather than just a eurozone one with proportionate access and funding. This also means that as a contributor to the EIB and EFSM, the UK would be involved, effectively underwriting a chunk of the financing - which could potentially be controversial in Westminster. Remember that the provision and Treaty change designed to put the permanent euro bailout fund (European Stability Mechanism) on a legally sounder footing while simultaneously giving the UK guarantees that it will not be implicated in euro bailouts in future, is still to be ratified in the UK parliament.

This would of course not be a "bailout" though, but something quite different. We hesitate to pass judgement on such an undefined plan, but here are some of our initial thoughts:

-          In principle this could be a positive idea for Europe - we like the focus of the investment and if it is conducted in the right way, it could be worth the UK participating. However, it's hard not to be slightly sceptical about how Europe tends to go about these kinds of schemes, which could instantly undermine that case.
-         The EU's new found infatuation with leverage seems to continue with this idea (which is strange given its views on financial regulation and the causes of the financial crisis). The lack of detail aside, the numbers in the plan seem stretched, at best.
-          Given the fairly limited contribution of European funds we wonder why the private sector would suddenly be so keen to invest in these projects. The project assumes that there is a glut of unfunded investment projects in Europe but it’s not clear why this new fund would massive ramp up investment over its currently depressed levels – if the private sector isn’t funding these projects now, why or how would the fund change this? 
-          The massive injection of money into the banking sector through ECB lending has failed to stir bank lending to such projects and some have cited a lack of viable, risk-appropriate demand for these types of loans. It is possible that the glut of unfunded programmes is not as large as the Commission believes, so this fund would not be addressing the correct problem. 
-          The EU already provides a huge amount of funding, through mechanisms such as the structural funds, which go to similar aims of development and investment. As we recently pointed out these could be spent much more efficiently and have a larger impact. The EU should focus on improving and reforming its current spending plans before trying to create new huge funds with grand aims. 
-          If this fund does come into place there needs to be a rigorous and clearly defined criteria for providing funding, which should be based solely around the ‘growth’ potential or economic benefits of the plan. The EU has fallen short on this front in many other areas of spending.
-          The areas mentioned for providing growth (infrastructure, green energy and high technology) all sound very promising and beneficial but need a carefully differentiated approach (which isn't happening in the structural funds). For example, in many areas (see Spain and Portugal) infrastructure spending has been high for some time but delivered few growth benefits and little more is needed. As the CAP and structural funds show, mixing in scientific and environmental goals with economic objectives can become very messy. Although green energy and promoting new technologies are laudable aims they may not provide the best returns and may not be the most cost effective investments. The singular aim of growth should dictate investments rather than a convoluted over-arching strategy to attack many problems in Europe.

Unless these issues are addressed, we may just end up with another pot of European money being poorly targeted and failing to address a key problem.


Rik said...

Especially for green energy and infrastructure you likely need it backed up with some or better a lot real money or guarantees of sound parties (aka Germany).
Effectively like the EZ the only guarantees that count are those of the AAAs. No German guarantees say goodbye to this leverage.
New technology is needed but is long term. And likely the Southern PIIGS have an education problem there, so it should be done in the North (and probably alot in the UK with by far the best top-educations in the EU).
200 Bn is a joke anyway compared to the problems.

Denis Cooper said...

"Remember that the provision and Treaty change designed to put the permanent euro bailout fund (European Stability Mechanism) on a legally sounder footing while simultaneously giving the UK guarantees that it will not be implicated in euro bailouts in future, is still to be ratified in the UK parliament."

That's the radical EU treaty change agreed through European Council Decision 2011/199/EU of March 25th:

which the government doesn't like to talk about because Cameron gave Merkel what she wanted without getting anything substantive in exchange.

It doesn't actually guarantee that the UK won't be implicated in future euro bailouts.

It says in the preamble that: 

"(4) The stability mechanism will provide the necessary tool for dealing with such cases of risk to the financial stability of the euro area as a whole as have been experienced in 2010, and hence help preserve the economic and financial stability of the Union itself. At its meeting of 16 and 17 December 2010, the European Council agreed that, as this mechanism is designed to safeguard the financial stability of the euro area as whole, Article 122(2) of the TFEU will no longer be needed for such purposes. The Heads of State or Government therefore agreed that it should not be used for such purposes."

But as that isn't translated into an article in the Decision it really only records what the Heads of State or Government agreed at that meeting in December 2010; they could still change their minds about it a future meeting; and any decision to change their minds and once again abuse Article 122(2) could be taken by QMV over the objections of the UK Prime Minister.

For it to provide a proper guarantee for the UK, there should have been another article in the Decision to put all decisions on the activation of Article 122(2) back to unanimity rather than leaving them on QMV.

As for the treaty change putting the permanent euro bailout fund "on a legally sounder footing", there is no footing at all without it, and according to this analysis:

there will still be no footing with it.

However if Merkel now believes that she can get away with doing what she wants to do without this EU treaty change which she was so insistent on getting in the autumn of 2010, there is now no reason to waste UK parliamentary time on a Bill to approve it or to waste goatskin on an instrument to finally ratify it.

Denis Cooper said...

As for the projected growth fund, I think your paragraph starting:

"Given the fairly limited contribution of European funds we wonder why the private sector would suddenly be so keen to invest in these projects ... "

gets to the nub of it.

Unless the "European funds" would be used to give the private investors some measure of protection against losses in the likely event that some of the projects went wrong.

Anonymous said...

Private investors can insure against losses. The major problem for us all is that much of the losses are born by the taxpayers in all European countries. We should not be collectively responsible for the profligate behaviour of the PIIGS.

Rollo said...

Governments can do very little to help business thrive; what they can do is stop mucking business about. Business will take off by itself, and only needs to have its excesses controlled. But the EU's only cause for existence is to muck people about, by virtue of having 10s of thousands of legislators who know nothing and have never done nuffink else. So this Marshal plan lacks anyone able to marshal it, and is pointless, too.

Spetses Gallery Akroproro said...

Make your voice heard, paricipate in our experiment for +Spaces EC funded project! Post your comments!/pages/Positive-Spaces/130795383642339

Open Europe blog team said...

Thanks Spetses Gallery Akroproro - Just a quick question though: would you consider this good use of taxpayers' money and the best way to spend EU funds in Greece (if that is indeed what is happening)?

Rollo said...

Why is the Turkish flag at the pinnacle? Is that just to rub the Greek noses in their downfall?

Spetses Gallery Akroproro said...

The balance is key, EU funds, tax payers money and social security, but we have to find out the best way to EU growth without social exclusions