Transcript Re launching the EU economy - Fondazione Italianieuropei

Beyond Austerity without Treaty revisions, new institutions,
fiscal transfers or national guarantees
Stuart Holland
Faculty of Economics University of Coimbra
[email protected]
Conference on Beyond Austerity: Recovering Employment and Growth
Foundation for European Progressive Studies (FEPS), Initiative for Policy Dialogue (IPD)
and Fondazione Italianieuropei
May 1st 2012 Rome
Outline of the Presentation
Introduction
1.
2.
3.
4.
5.
6.
Both Stabilisation and Growth
The Delors Bonds
By Enhanced Cooperation
Without Treaty Revisions or New Institutions
With EIB and EIF Co-finance
Financing both Recovery and Cohesion
Introduction
1.
The Commission proposal of Project Bonds is well intentioned but
would not need member state guarantees
2.
The European Investment Bank has issued project finance bonds
for over 50 years without such guarantees
3.
What is needed is public co-finance for EIB project financing
4.
This can be through Eurobonds issued by the European Investment
Fund attracting surpluses from the emerging economies and
sovereign wealth funds
5.
Such finance need not count on national debt and does not need
debt buy-outs, not fiscal transfers, nor a new institution or a Treaty
revision
European Commission (2011). Feasibility of introducing Stability Bonds. Green Paper. COM(2011),
November 20th
1. Both Stabilisation and Growth
1.
Stabilisation by Union Bonds
The EU could cut the Gordian knot of the debt crisis if it
converted a tranche of the sovereign debt of member states to
Union Bonds which are not traded but held in its own ‘debit
account’
2.
Recovery through Eurobonds
A social investment led recovery programme funded, like the
US New Deal, by ‘borrowing to invest’ through net issues of
Eurobonds should be traded and would attract inflows from
sovereign wealth central banks and central banks of the emerging
economies.
A Gestalt Shift
What is needed to ‘cut the Gordian knot’ on debt is a Gestalt shift and a
recognition that while EU member states are deep in debt the EU itself
has next to none.
It had none at all until May 2010 when the European Central Bank began
to buy up tranches of some member states’ national debt
► If the EU were to issue its own bonds to finance a New Deal style
economic recovery it would be starting from less than a tenth of the
borrowing base of the Roosevelt administration in the 1930s.
► This can be through the issue of Eurobonds by the European
Investment Fund, which was designed to do so for the Delors Union
Bonds
2. The Delors Bonds
Jacques Delors included the proposal for Union Bonds in his ‘full
employment’ White Paper of December 1993. [1]
He set up the European Investment Fund to issue the bonds.
The key parallel was US Treasury bonds which do not count against the
debt of American states such as California or Delaware.
Therefore what now would be Eurobonds need not count on the debt of
EU member states.
[1] Stuart Holland (1993) The European Imperative: Economic and Social Cohesion in the
1990s, Spokesman Books
The New Deal Parallel
But the New Deal parallel was not made in the Delors White Paper which
meant a major legitimation of the case for the bonds was lost.
The proposal therefore lacked resonance with a wider public.
For too many people ‘Union Bonds’ just seemed another arcane
European financial instrument.
We should avoid this now.
A recovery programme financed by Eurobonds should be recognised as
financing a European New Deal, legitimated by parallels with that of
the US in the 1930s.
Bonds and Fiscal Policy
The US of course has a common fiscal policy. The EU does not.
But Eurobonds could be project financed from the revenues of the
member states gaining from them, as are EIB bonds.
A common fiscal policy and a European Treasury are aspirations, which
would need Treaty revisions.
As the European Investment Fund recently confirmed to the Economic
and Social Committee of the Union, it could issue the bonds without a
Treaty revision.
3. By Enhanced Cooperation
According to the Treaty on European Union enhanced cooperation is by a
minority of at least nine member states.
Yet the introduction of the euro itself was a de facto case of majority
enhanced cooperation.
On this strong precedent, any member state could gain project finance
through Eurobonds, but not all member states need agree to the issue
of them.
► Germany, Austria, Finland and others could keep their own bonds.
Enhanced Cooperation 2
Enhanced cooperation needs agreement to the procedure by a qualified
majority vote.
Yet since all member states rather than only those in the Eurozone can
gain finance from Eurobonds.
A qualified majority in favour is feasible - not least since the UK is in
favour of Eurobonds.
Also, on the motion for an enhanced cooperation policy implementing the
procedure only those member states supporting it vote.
Some member states therefore may choose not to vote for adoption of
Eurobonds but cannot block this if the procedure is approved by a
QMV of all EU member states.
Criteria
Recovery project criteria do not need to be defined by the Commission.
or agreed by Ecofin. They already have been agreed by the European
Council.
On proposals by Antonio Guterres, to implement the 1997 Amsterdam
Special Action Programme, the EIB has been remitted by the Council
to invest in:
► health
► education
► urban regeneration
► environmental protection and green technologies
► support for small and medium firms and high-tech start-ups
Criteria 2
At Lisbon 2000 the EIB also was given a specific remit to promote
economic and social cohesion and convergence.
These are far wider ranging criteria than only infrastructure or industrial
infrastructure.
They concern central cohesion areas such as health and education
whose investment finance can be European rather than national.
In terms of social wellbeing they also are vital in terms of urban
regeneration and protection and enhancement of the environment.
4. Without Treaty Revisions or New Institutions
Eurobonds can be introduced without Treaty revisions and without new
institutions.
The European Investment Fund, which was designed to issue the Delors
EU Bonds, and now is part of the European Investment Bank Group,
has confirmed to the Economic and Social Committee of the EU that:
It does not need a Treaty revision to issue Eurobonds, rather than an
increase of its subscribed capital from its present minimal level of
€3bn.
And this depends only on a management decision.
Macroeconomic Potential
Since the 1997 European Council decision that it should be remitted to
finance eco-social investments, the EIB has quadrupled its lending.
This is why it now is nearly 3 times the size of the World Bank.
Matched by co-investments from Eurobonds, and with investment
multipliers of up to 3 1]
This would mean a cumulative investment led stimulus to the European
economy which could rise by or before 2020 to a net addition of 9 per
cent to EU GDP
► and make a reality of the commitment of the EU to a European
Economic Recovery Programme.
1] Observatoire Français des Conjoncture Economiques 2010.
5.EIB and EIF Co-Finance
Bond issues by the European Investment Fund :
1.
would not primarily be by pension funds but by the central banks of
the BRIC emerging economies and sovereign wealth funds
2.
Their concern is not with a AAA rating by agencies but to diversify
their foreign exchange holdings out of the dollar
3.
This also is a ‘store of value’ rather than rate of return concern for
the BRICs
4.
Bloombergs have sounded US financial markets and indicated that
interest rates on Eurobonds could be lower than 2%.
A European Venture Capital Fund
One of the main gains from the EIF issuing bonds is that their scope –
unlike the Commission’s Own Resources – is near unlimited in terms
of inflows to the Union from the central banks and sovereign wealth
funds of the emerging economies.
Another is that these could fulfil one of original design remits for the EIF
– to finance a European Venture Capital Fund.
This has implications, as in the design of the Delors bonds, for both
growth and competitiveness.
Germany has a Mittelstandspolitik and does not need financial
instruments for small and medium firms. But a European Venture
Capital Fund could offer this for the European periphery.
From Weakness to Strength
With net issues of Eurobonds bonds, the euro would become a global
reserve currency, taking the strain off the dollar
Both the US and the trade surplus economies would gain if this is part of
a European recovery programme
- whereas contraction of the European economy as an outcome of debt
stabilisation without a recovery programme would reduce both US
exports and those of the emerging economies
Risking thereby a meltdown of the global economy
6. Financing both Recovery and Cohesion
Such financing is not just ‘back to Keynes’.
Keynes was primarily concerned to achieve higher levels of effective
demand through monetary and fiscal policies.
He aimed to raise private sector confidence by indirect intervention.
By contrast, EIB-EIF joint project finance can directly realise investments
in the social sectors for which the European Council already has
agreed the criteria.
With matrix, employment, income and fiscal multipliers gained directly
rather than indirectly through interest rate and tax changes.
Meeting Latent Demand
The proposals also are post Keynesian since concerned not only to
achieve higher levels of effective demand
But also to meet latent demand for such social investment projects which
have gained planning and environmental approval
yet not been realised because of the constraints of the Stability and
Growth Pact on national co-finance
When proposing Union Bonds in 1993 Delors sounded out how many
projects at the time had gained planning approvals but had not been
realised because of lack of national co-finance.
The figure was 750 billion ecu. Today it would be between 1 and 2 trillion
euros.
Not Just Recovery
The potential is not to recover the past and to project it for the future
but to finance an alternative future especially since:
► neither EIB bonds nor EIF Eurobonds need count on national debt
► social investments could be funded by such Union financial
instruments
► as they were in the US New Deal
► thereby enabling higher levels of employment
► and promoting economic and social cohesion
Releasing National Fiscal Revenues
Shifting social investments to Europe also would release a major share
of national fiscal revenues
to achieve the as yet unrealised commitment of the Essen European
Council to ‘more labour intensive employment in the social sphere’
and therefore enabling
► more teachers and smaller class sizes, as aspired to by François
Hollande
► more health workers for an ageing population
Global Implications
Revenues for this would be supplemented also by higher fiscal receipts
from recovery of employment in both the private and social sectors
and thereby
► both realising latent demand and restoring the effective demand which
is vital for both higher levels of employment and also sustained trade
with the US and the emerging economies
►with investments in the social sphere through bond finance
recycling global surpluses in a manner vital for a more
balanced global economy
End