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.