Download European Recovery Plan, Union Bonds and Budget Reform

European Recovery Plan, Union Bonds and Budget Reform
Alberto Majocchi – Alfonso Iozzo
1. - The first, feeble signs of recovery appeared in Europe after the financial tsunami that threatened
to disrupt the world economy cannot hide the fact that the predicted growth for 2010 is still quite
modest and it will take many years for people to get back to the pre-crisis income levels. On the
other hand, the negative impact of income falloff on tax revenues has produced significant
unbalances in public finance accounts, making it difficult to put in place expansionary policies.
Within a monetary union, a policy of income and employment stabilization run at the national level
produces nowadays very limited effects, and must be supported necessarily by a plan of
interventions managed at the European level. An expansive policy run by a single member country
of the European Union concentrates costs -hence the increase in public finance indebtedness- in the
country that carries it out, while the benefits in terms of expansion of demand are transmitted to a
large extent abroad, in the other countries of the European internal market. In the presence of
significant positive externalities, the production of the public good “stabilization” is therefore suboptimal, since every country finds it convenient to wait until others take the initiative, thus avoiding
to bear the costs.
The necessity to launch a European project to stimulate the economy in this difficult phase
following the financial crisis is generally acknowledged but, confronted with the difficulties of
building the necessary political support in an institutional framework characterized by the absence
of a European government of the economy, there is anyway a strong desire to try to get a similar
result through support measures taken at the national level. However, also on the basis of the
experience accumulated since the start of the crisis, it looks utterly illusory to think that a
coordination of national policies could lead to results similar to those attainable with a European
recovery plan.
2. - The burst of the crisis has in addition made it apparent that a phase of the European economic
growtht has now come to an end. The decisive factor of growth was represented by a technological
development of an imitative type: in essence, it was enough to import the best technologies from the
more advanced countries to increase productivity and hence continuously raise the living standards
of the population. But Europe has now reached the technological frontier and is not able any more
to relaunch development by importing technologies from abroad. If it wants to start growing again,
Europe must count only on its own resources and in particular on a renewed and strong capacity of
producing innovation, in order to promote an increase in productivity and in its ability to
successfully compete in the world markets.
From the present crisis we will not get out with a mere policy of support of the demand of
consumption goods; instead, it is a question of launching a new phase of growth of the European
economy, with the aim to promote a development that has to be sustainable on the economic, social
and environmental plan. The motor of that new development phase shall be, then, public
investments, which will have short-term effects in supporting demand and employment, but also
long-term effects on the supply side, by making higher the potential income and more competitive
the European economic system.
3. - A lasting growth of the European economy implies, in fact, a productivity increase, which in
turn requires a series of measures that shall be taken and implemented at the European level in order
for them to be effective, in the framework of an evolution of the world economy that looks today
quite different than in the past. A new technological revolution has by now taken place, and the
United States was able to take the greatest benefits of it, with very high growth rates in productivity
and output, while the new industrially emerging countries are now competing in many sectors (and
not just in those with mature technologies) with the countries of long-established industrialization.
Europe is thus caught in from two sides and has difficulties to find a new road to a stable and
sustainable growth.
In the United States, productivity growth was supported by a technological development originated
and accelerated by public demand, coming in particular from the defense sector, that made
investments of a very innovative nature possible. But such a propulsive element cannot be
envisaged in Europe, where military expenditures are necessarily limited after the tragic experience
of nationalism and the ruins caused by WWII.
4. - The increase in investments is therefore tied by necessity to the launch of a plan promoting a
sustainable development and improving the Europeans' living standards, through expenditure plans
for research and higher education, the betterment of the network of material and immaterial
infrastructures, the promotion of energy efficiency and the use of renewable energies, the support of
soft mobility, and for assuring the conservation of the patrimony of artistic and natural riches, and
favoring urban renewal. But the implementation of such a plan is blocked by, on the one hand, the
constraints plaguing national budgets, and, on the other, the limited size of the European budget and
the inability to take constructive decisions in an institutional structure of a confederal type like the
one that still dominates at the European level.
The recovery plan can be financed through the issuing of securities by the EIB as far as investments
in infrastructures or in projects liable to generate revenue on the market are concerned, while it shall
be covered by the issuing of bonds guaranteed by the Union's budget when there is to finance
expenditures that have the nature of investments aimed to the production of European public goods.
The issue shall reach an amount equal to at least on point of the GDP of the euro-area -i.e. of the
order of €100 billion- in order for it to have a meaningful macro-economic impact and a positive
influence on the confidence of families and businesses.
5. - Supporting development on the part of European institutions by recurring to Union bonds in
addition to budget resources, was already done in the past. In the 1950s, the ECSC financed through
the issue of bonds of its own the conversion of the coal industry (which represented the energy
problem of the time), while in the 1980s the Commission, with the proposal of Commissioner
Ortoli, intervened with the NIC (Nouveau Instrument Communautaire) in support of the industrial
conversion made necessary by the changes brought about by the oil crises.
Thanks to the Union's prestige in the world market and the current strength of the European
currency, the Union bonds could be issued at a low interest rate and could contribute, beside
strengthening the European financial market by absorbing part of the liquidity surplus that is one of
its present features, to help attract a large share of world savings that, lacking suitable alternatives,
are still invested in the American market despite the dollar's progressive loss of value.
Should the maneuver be realized up to the recommended amount, the European budget would rise
to a comprehensive volume equal to about 2% of GDP -as already suggested in 1993 by the
commission of experts tasked with the study of the role of fiscal policy in an economic and
monetary union in its Stable Money-Sound Finances. Community Public Finance in the Perspective
of EMU Report-, and would be composed of two sections: a section in capital account, financed
with Union bonds and aimed to finance the development plan; and a balanced section -in line with
the rules of Art. 310 of the Treaty on the Functioning of the European Union-, which finances the
agricultural policy and the redistribution and cohesion policies.
In the new context of the European economy -characterized by the necessity of a conversion for
facing the challenge of environmental sustainability and the changed structure of the world market
caused by the transformation of demand brought about by the growing purchasing power of the
emerging countries and by the ensuing necessity to raise the savings of the already developed
countries- we can see different modes of intervention that can be carried out through the action of
European federal agencies.
6. - The American experience demonstrates how in a federal system it is possible for the
government to mobilize huge resources in support of economic growth, provided that at the same
time a full transparency and responsibility is assured in the use of the funds collected at the federal
level. The two most meaningful examples of federal agencies are represented by the Tennessee
Valley Authority, instituted by Roosevelt as the exemplary instrument of the New Deal, and, in the
post-WWII period, by NASA, instituted with the aim to face the challenge with the USSR in the
Space Race, which gave origin later to the great progress in information technologies whose
emblematic symbol is the Silicon Valley.
A system of federal agencies would allow, on the one hand, to keep in the hands of political
institutions (the Commission, the Council and the Parliament) the choice of the objectives to be
pursued and the priorities in their implementation, and, on the other, to entrust to the agencies the
task to realize individual programs, maintaining the authority to control the outputs and the use of
public money (which would be very difficult to do if the resources to invest are part of the general
budget).
Such a system has already been successfully realized in Europe, first with the ECSC and later with
the EIB, where the Board of Governors (composed of the Finance Ministers) sets the priorities,
while the Board of Directors, where a representative of the Commission sits, implements the
operational decisions. And in fact the EIB's success induced the American Congress to examine a
proposal to institute a federal National Investment Bank, just taking inspiration from the European
model, and that proposal is currently supported with determination by the Obama Administration.
7. - The historical activity of the EIB can today go hand in hand with the agencies created jointly by
the European Union, with the same EIB, and financial public institutions (Caisse de Depôts, Cassa
Depositi e Prestiti, KfW, etc.) oriented to the long-term, capable of sharing in the capital of
companies concessionaires of networks, as in the case of the “Marguerite” fund, now in its start-up
phase. The Union bonds issued by those agencies can be repaid with the revenues coming from
their respective investments, although with long-term reimbursement plans, given the characteristics
of that type of projects, which the financial market institutions, oriented to the short-term, are
unable to give suitable answers to.
Such agencies, managing public goods presenting monopolistic features, are in a position to impose
the payment of use rights (“taxes”) on market operators exploiting such goods. On this point, there
is to consider the fact that technological evolution and the constraints of environmental
sustainability considerably widen the need to use public goods (suffice it to think of air quality in
the cities).
A particularly meaningful example of joint projects is the “Galileo” project for the use of satellites,
but there may be other cases of shared usage of the airspace. The juridical instrument to resort to in
such cases is the “joint undertaking” provided by Art. 187 of the Lisbon Treaty.
8. - As to the financing of research and innovation, a real program replacing the disastrous Lisbon
strategy launched ten years ago must single out a limited number of strategic projects -as the USA
did with NASA-, where to concentrate the European common resources. In addition to the energy
sector, and in particular the new renewable sources, one shall not forget basic medical research,
which cannot be left entirely in the hands of multinational companies.
The financing of the agencies cannot but pass through the Union's “warranty”, that must ensure,
through its own budget, that the funds collected through the Union bonds will be paid back. The
project, already put forward by Delors, to resort to a European “Carbon Tax” -endorsed today by the
Swedish Presidency- becomes topical once more.
9. - The increase of the EU budget's size, aimed to support the European development plan, would
also allow to proceed to a first rationalization (hence a parallel reduction) of the member States'
military expenditures, with the creation of a first embryo of European Army – as recently proposed
in the Munich Security Conference by the German Foreign Minister Westerwelle-, and to launch a
Marshall Plan for the countries overlooking the Mediterranean, aimed at stimulating the
endogenous development projects able to rein in the migratory flow towards the European Union,
and the social problems connected to that in the immigration countries.
The fact remains, however, that, due to the fact that the increase of the EU budget is limited to 1%
of the European GDP initially, the dimensions of the potential market for Union bonds are anyway
influenced by its limited size, as it is supposed to guarantee their service and reimbursement.
Consequently, to the extent that the requests of investments to be financed through European debt
will inevitably grow further in the next years, in parallel becomes more urgent the need to proceed
to an in-depth reform of the European budget.
10. - In the perspective of a reform of the European budget aimed to make it capable of
guaranteeing the financing of the investments required by a European recovery plan, through the
issuing of public debt securities, it is necessary to contemplate a return to a system of veritable EU
own resources. In fact, it is not a true own resource the so-called fourth resource, which is nothing
else but a national contribution proportional to a nation's GDP, which should be replaced with a
European surtax, additional to the national income taxes -which will not be touched by the reform-,
directly paid by the citizens to the European budget so as to assure a better transparency of the tax
collection and reinforce at the same time the responsibility of those using up the resources.
A new resource could be provided to the European budget by reconsidering the Directive Proposal
introducing a carbon/energy tax. In a situation where the dangers connected to climate change
appear clearer and the ever more urgent necessity emerges to replace fossil fuels with alternative
energy sources, a tax proportional to the carbon content of energy sources appears to be a suitable
instrument to start virtuous energy-saving and fuel-switching processes in the direction of
renewable energy sources, reducing the negative impact on the environment of energy consumption,
and favoring the introduction of less energy-intensive production processes, thus promoting the
transition to a low-carbon economy.
That tax, whose structure is outlined in the Directive Proposal approved by the European
Commission in 1992, with an estimated yield at full speed of 1% of the European GDP, would have
a twofold objective: to finance the budget and guarantee the debt service, and, at the same time, to
promote the conversion of the European economy along a path of sustainable development. The tax
could be introduced by the Union unilaterally, in order to avoid a stalemate otherwise caused in
every country by the fear that the other members will behave as free-riders, and to exert a
considerable pressure on the member States in view of a multilateral agreement to be reached in the
post-Copenhagen phase, without putting at risk the external competitiveness of European
production if it were accompanied by the introduction of a border tax adjustment to be levied on
imported goods, of the same amount as that resting on the shoulders of European producers.
11. - The launch of the European development plan, with the issue of Union bonds and the
introduction of a carbon/energy tax to ensure an enlargement of the European budget and promote
the transition towards a sustainable economy, presents obviously difficulties of a political nature,
since it implies to reach an agreement between all the governments. In addition to the objections of
principle by countries like the UK, which oppose any initiative contemplating a government of the
economy at the European level, there is also a resistance on the part of Germany, because the Berlin
Government believes that the cost of an issue of Union bonds would be higher than the cost of
German issues. Actually, the risk of default of some countries of the euro-area pushed upward
interest rates and weakened the value of the European currency, while a crisis of those same
countries would inevitably hit German export, which for German enterprises represents the main
component affecting the growth of demand. But, as Padoa Schioppa observed – and a similar
opinion has been expressed by Eichengreen-, the Greek crisis does not represent, as many argue, the
prelude to the end of the euro; on the contrary, just when the crisis hit one country and threatened
the euro, the governments “began to understand that we cannot do any longer without the State of
the euro”, and a process started that shall bring us from a monetary Union -a currency without a
State- to a political Union.