Eurozone stagnation demands real solutions

19/11/2014

Juncker’s EU investment plan is noble – but much more will be needed

After three years of near stagnation and with unemployment stuck at double digit levels, it is increasingly clear that the eurozone’s political and economic crisis will intensify if there is no boost to growth. Any proposal that seeks to revive demand across the currency union therefore deserves to be examined closely.

Next week, Jean-Claude Juncker, the European Commission president, is expected to unveil such a plan, setting out details of a €300bn investment programme aimed at boosting EU growth over the next three years. Mr Juncker is flagging this as the first big initiative of his presidency. But it is unlikely to have the effect he desires.

This is not the first time that the European Commission has launched a programme to stimulate the EU economy. Two years ago, during the depths of the eurozone crisis, Mr Juncker’s predecessor José Manuel Barroso managed to secure support for a similar €180bn investment plan. It has had no discernible effect.

Now the commission is trying again. According to a proposal described to the Financial Times, Brussels is considering the creation of investment funds seeded with cash from either the EU budget or the European Investment Bank as the centrepiece of a new growth plan. The commission would seek to entice private investors to finance European infrastructure projects, with Brussels assuming most of the downside risk.

Europe needs this kind of initiative. An injection of €300bn of investment would, if fully effective, be equivalent to 0.8 per cent of the EU’s GDP. But the early signs are that Mr Juncker has raised expectations too high. The main reason for concern is that his plan looks set to avoid creating any new public debt. As a result, the amount of fresh public funding coming into the programme will be limited – and certainly well below the €60bn to €80bn demanded by Paris.

It is far from certain how much private capital such a narrowly-financed scheme would leverage. Emmanuel Macron, the French economy minister, could be forgiven for arguing this week that the plan will end up being “disappointing” and needs to be funded with “real money.”

Mr Juncker’s proposal is noble in its intentions. But it should not distract from the more fundamental steps that need to be taken to revive growth. Berlin should stop obsessing about having a balanced budget and move to a more expansionary fiscal policy. Mr Macron is right to argue that if France cuts its budget by €50bn, Germany should respond by increasing its own spending by the same number.

The German government should also allow the European Central Bank to play its part in the recovery, giving it the necessary political cover to move to full-blown quantitative easing in order to rescue the bloc from the brink of deflation. With both fiscal and monetary policy pointing in a more accommodative direction, France and Italy would have more breathing space to implement painful but necessary structural economic reforms, such as overhauling their labour markets.

Germany’s unwillingness to change course on fiscal and monetary policy risks prolonging the eurozone’s economic travails and widening Berlin’s divisions with Paris, traditionally its main EU partner. Here, Mr Juncker has a significant role to play. As a commission president who was backed by chancellor Angela Merkel, he should seek to persuade Germany to change its economic policy and reconcile its differences with France. It is on this issue – more than on any other – that his presidency will ultimately be judged.

Πηγή

Σχετική δημοσίευση εδώ.