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A New Deal for Europe
without Treaty revisions, new institutions, fiscal transfers or
national guarantees
Presentation to the Conference of the Economic and Social Committee of the
European Union
The Sovereign Debt Crisis: Towards Fiscal Union in Europe?
Jacques Delors Building, Brussels June 7th 2012
Stuart Holland
Former Advisor to Jacques Delors and Faculty of Economics
University of Coimbra
[email protected]
Outline of the Presentation
Introduction
1.
2.
3.
4.
5.
6.
Both Stabilisation and Growth
By Enhanced Cooperation
EIB and EIF Investment Co-finance
A European Venture Capital Fund
Recapitalising Banks
Not ‘Just Back to Keynes’
Introduction
1.
A clearer distinction needs to be made between bonds for
stabilisation of debt and bonds for recovery.
2.
The Commission proposal of Project Bonds is well intentioned but
would need member state guarantees.
3.
The European Investment Bank has issued bonds to finance
investment projects for over 50 years without such guarantees
4.
What is needed for recovery of the EU economy is public co-finance
for EIB project financing
European Commission (2011). Feasibility of introducing Stability Bonds. Green Paper. COM(2011),
November 20th
Introduction
5.
This can be through Eurobonds issued by the European
Investment Fund attracting surpluses from the emerging
economies and sovereign wealth funds
6.
Such funding need not count on national debt and does not need
debt buy-outs, nor fiscal transfers, nor a new institution nor a
Treaty revision
7.
Such inflows to the Union both could finance a European Venture
Capital Market and recapitalise banks.
8.
But recapitalisation only would be justifiable only if there is a
recovery of growth in the EU sufficient for them to earn revenues
to service the new capital.
1. Both Stabilisation and Growth
1. Stability Bonds
The EU could convert a tranche of the sovereign debt of member
states to Stability Bonds – or Union Bonds - which are not traded
but held in a ‘debit account’
There are two main options on this: 1 to convert debt of up to 60%
of GDP. Or, 2 to convert debt of over 60%, as advocated by the
German Council of Economic Advisers.
The latter approach, subject to conditionality, would have the merit
of resolving the Greek crisis.
Both Stabilisation and Growth 2
2. Commission Project Bonds
These would be co-financed by the private sector and need member
state guarantees.
This is not insuperable. But when Margaret Thatcher tried to gain
private sector finance for a high speed link from the Channel to
London without Treasury guarantees
The private sector co-finance never happened. The link was delayed
for nearly 20 years and built when Gordon Brown gave guarantees.
Lack of private sector co-finance also has delayed completion of
most of the 33 TENs originally proposed in 1994.
Both Stabilisation and Growth 3
3. Recovery through Eurobonds
What is needed is both stabilisation of the debt crisis and an
investment led recovery programme is net issues of Eurobonds.
Unlike Stability Bonds these should be traded and would attract
inflows from sovereign wealth funds and central banks of the
emerging economies.
A Gestalt Shift
What also is needed is a Gestalt shift and 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 and some
non- performing debt of banks.
►
If the EU were to issue its own bonds to finance a New Deal style
economic recovery it would be starting from some 2% of EU GDP.
►
This is only a sixth of borrowing base from which the Roosevelt
administration in the 1930s expanded borrowing to finance The New
Deal.
The Delors Bonds
Jacques Delors was advised to propose 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.
EIB bonds are not counted on national debt by any major Eurozone
member state, nor by Ireland, Portugal or Greece.
[1] Stuart Holland (1993) The European Imperative: Economic and Social Cohesion in the 1990s,
Spokesman Books. Foreword Jacques Delors.
The Missed 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 US of course has a common fiscal policy. The EU does not.
But Eurobonds for recovery could be project financed from the revenues
of the member states gaining from them, as are EIB bonds.
This does not need a common fiscal policy even if this remains a longer
term aspiration.
As with a conversion of national debt to the Union, Eurobonds also could
be introduced by enhanced cooperation.
2. By Enhanced Cooperation
According to the Treaties 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 precedent, any member state could gain project finance through
Eurobonds, but not all member states need agree to the issue of them,
nor to the transfer of a share of their debt to the Union.
► Germany, Austria, Finland and others could keep their own bonds.
This solution is confederal not federal, but could be implemented now.
Enhanced Cooperation 2
On a motion for an enhanced cooperation policy only those member
states supporting it vote.
A member state could in principle call for an enhanced cooperation
procedure by a qualified majority vote.
Yet since all member states rather than only those in the Eurozone could
gain finance from Eurobond financed recovery, this could well
succeed.
- not least since the UK, France and Italy favour Eurobonds and that they
would advantage other major member states such as Spain or Poland.
It therefore is likely either that a QMV would be carried or that some
member states anticipating this would not call for a QMV on the
procedure.
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.
They have given the EIB a cohesion and convergence remit to invest in:
► health
► education
► urban regeneration
► environmental protection and green technologies
► support for small and medium firms and high-tech start-ups
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.
This would be less than a currently anticipated increase of the subscribed
capital of the EIB
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.
A further quadrupling would mean a cumulative investment led stimulus
to the European economy which could rise by or before 2020 to 9% of
EU GDP
with investment multipliers of up to 3 1]
► thereby enabling fulfilment of the European Economic Recovery
Programme.
1] Observatoire Français des Conjoncture Economiques 2010.
Constraints
There currently are constraints on expanding EIB borrowing.
The EIB ‘house rule’ – rather than a Treaty provision – is that it needs
50% co-finance. Although it has relaxed this in some cases, national
co-finance since the onset of the financial crisis has been constrained.
This is of concern to pension funds since the EIB’s AAA rating could be
in question since the funds are obliged to invest only through AAA
rated institutions.
This constraint could be overcome by the EIB and EIF – now part of the
EIB Group – jointly financing investment projects over which the EIB,,
would retain project control.
3. EIB and EIF Co-Finance
Eurobonds issues by the European Investment Fund :
1.
would not be purchased primarily by pension funds but by the
central banks of the emerging economies and sovereign wealth
funds
2.
Their concern is not with a AAA rating by agencies but to diversify
their foreign exchange holdings
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 as low as 1.9%
4. A European Venture Capital Fund
One of the main gains from the EIF issuing bonds is that their scope is
near unlimited in terms of inflows to the Union from global surpluses
► unlike the Commission’s Own Resources or Structural Funds
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 new financial
instruments for small and medium firms. But a European Venture
Capital Fund could offer this for the European periphery.
5. Recapitalising Banks
One of the main potential gains also from Eurobonds is that they could
recapitalise banks.
China especially has an interest in this since if there is a collapse of
major European banks and a disintegration of the Eurozone, Chinese
exports could contract by trillions.
Such recapitalisation could not be managed or supervised by the EIF. It
would need involvement of the ECB
It also would need a recovery of growth for the banks to be able to
service such bonds.
Recapitalising Banks 2
But it would not need a Banking Union or a federal supervisory structure
– however desirable this may be in the longer term.
The EIF could begin to issue Eurobonds from the end of this month,
especially if there were a decision in the European Council that it
should do so.
There are indications that this would be supported by Mario Draghi, not
least because this would reduce pressure on the ECB to issue bonds.
Such a decision also would not qualify the independence of the ECB
since without prejudice to its primary responsibility to support the
internal and external value of the currency it is Treaty bound ‘to
support the general economic policies of the Union’.
From Weakness to Strength
With net issues of Eurobonds the euro would become a global reserve
currency.
This need not undermine rather than complement the dollar
- since the US as well as the emerging 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 their
exports
- risking thereby a meltdown of the global economy and a generalised
currency crisis.
6. Not Just ‘Back to Keynes’
Joint EIB-EIF co-financing is closer to a European KfW solution than
‘back to Keynes’
Keynes was primarily concerned to achieve higher levels of effective
demand and raise private sector confidence by indirect intervention
through monetary and fiscal policies.
But monetary policy with near zero interest rates is ineffective while
national fiscal deficits need to be reduced.
By contrast, EIB-EIF joint project finance can directly realise investments
for which the European Council already has agreed the criteria.
With multipliers and income which can directly raise private sector
confidence.
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 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 approval but had not been
realised for this reason.
The figure was 750 billion ecu. Today after 3 years of austerity it would be
closer to or above 2 trillion euros.
Releasing National Fiscal Revenues
Rather than deficit spending, shifting social investments to Europe also
would release a major share of national fiscal revenues
► which could contribute to reducing excess national debt and to
assisting structural reforms
But also achieve the as yet unrealised commitment of the Essen
European Council to ‘more labour intensive employment in the social
sphere’
► with more teachers and smaller class sizes, which would enhance
the Bologna process
► plus more health workers for an ageing population
Global Implications
Net issues of Eurobonds therefore could
► realise latent demand and restore the effective demand which is vital
for sustained trade with the US and the emerging economies
► offer a more plural reserve currency system which also is a
priority for the emerging economies
► recycle global surpluses in a manner crucial for
balanced and sustainable global development
► avoid the otherwise imminent threat of the worst global
economic crisis since the 1930s.
End