Germany and the European Commission’s €315 Billion Infrastructure “New Deal” is Yet More Smoke and Mirrors

I have to confess I had not taken the announcement of a €315 billion infrastructure spending program by the European Commission all that seriously, despite the fact that this on the surface represented a very serious departure from the Troika’s antipathy for anything resembling fiscal spending. It was so out of character that something had to be wrong with the picture, particularly given the absence of any evidence of Pauline conversions from the Germans. And that’s before you get to the fact that while €315 billion sounds impressive, given that the spending is likely to be spread out over time, the size of the shot, even if it worked as advertised, is less impressive than it might seem.

In fact, the history of post-crisis interventions in the Eurozone has been that of sleight-of-hand over substance, except as far as austerity program are concerned. Ambrose Evans-Pritchard peels away the dissimulation in the latest effort at confidence building, with emphasis on the con. From the Telegraph:

The European Commission has launched a €315bn “New Deal” to pull Europe out of its economic slump over the next three years, but will provide almost no new money of its own and is relying on subprime forms of financial engineering.

The shopping list of investments and infrastructure projects will take months to sift through, and the stimulus will not reach meaningful scale until 2016. The scheme has already run into a blizzard of criticism. It depends on leverage that increases the headline figure by 15 times, leaving EU taxpayers bearing the heaviest risk while private investors are shielded from losses..

“The money is chicken feed and it won’t do anything to kick-start growth,” said Professor Charles Wyplosz, from Geneva University. “It is unbelievable they are doing this rather than real fiscal expansion. The private sector will just take governments to the cleaners.

“This is really an excuse to pretend they are they doing something while the austerity is still going on. It will take too long to work and there will be a big fight over the projects as every country tries to get a share of the cake.”

Yves here. So not only will there be no actual stimulus, what “spending” there is will be attenuated, and subject to infighting which could intensify current divisions. Look at how paltry the official commitment is:

Further details will not be released until Wednesday but officials say privately that the package will be based on €21bn of EU money that will in theory lever almost €300bn of venture capital and private funds in a complex chemistry…

The projects are “higher risk” ventures that have been shunned by the European Investment Fund, jealous of its AAA rating. This places the issue of taxpayer risk squarely on the table. Governments have already sent a list of 1,800 possible projects to Brussels. These will be screened by a panel of independent experts. There will, in principle, be no national quotas.

And get a load of this:

The EU funds will mostly come from gutting the Commission’s research directorate and other parts of the existing EU budget, with €5bn in guarantees from the European Investment Bank (EIB). Werner Hoyer, the EIB’s chief, sought to play down what he called “exuberant” expectations.

The EU bodies will suffer the “first loss” if any project defaults, a device all too like the structured finance used in the heyday of the pre-Lehman boom, when Dublin became a hub for “special investment vehicles” (SIVs) that disguised the concentration of risk. The plans entail a de facto subsidy, but of a contentious kind. Critics call it “socialised loss, private gain”.

So this is just a “robbing Peter to pay private sector financier Paul” project, with banker financing costs getting what amounts to priority payout. The French sensibly wanted much more in government funds to leverage, on the order of €60 to €80 billion, and all of that in new money, rather than pilfered from other budgets. That would have provided at least some genuine net stimulus, as well as big enough overall package to have more psychological impact. So this is yet another way too little, way too late measure from the Eurozone. The officialdom has been able to see these measures as adequate precisely because they’ve managed to stave off the worst-case scenarios of a financial crisis and a Eurozone breakup. But that standard of performance is so low as to assure continuing increases in social and political pressure as unemployment festers and economic conditions falter. It’s not clear how this plays out, but it’s hard to see any scenario that delivers happy endings, even for the people in charge. History is unlikely to look kindly on anyone in a policy position now.

Print Friendly, PDF & Email


  1. proximity1

    Your prose style compliments your readers while informing them:

    e.g. here
    ” …given the absence of any evidence of Pauline conversions from the Germans…” — a choice turn of phrase–
    and here
    “In fact, the history of post-crisis interventions in the Eurozone has been that of sleight-of-hand over substance, except as far as austerity program are concerned,”
    capturing so much in a single phrase.

  2. TheraP

    OK, if I understand this story, 5 billion € + smoke and mirrors is enough to keep the EU Teeter-Totter “grounded” and lift its economy “up in the clouds”. Or something.

    Da Nile is a wonderful thing…

  3. BillC

    I think a foreword to the unkind history you foresee was written three days ago.

    Regional legislative elections were held in two Italian regions last Sunday, Sicily and Emilia-Romagna. Emilia-Romagna has long been recognized as the Italian leader in civic virtue (see “Bowling Alone” by Prof. Robert Putnam), as well as the very heart of Italian leftist politics. Emilia was the stronghold of the late, lamented Italian Communist Party (PCI), which for the first 4-5 post-war decades dominated Emilia’s economy and politics like the Chamber of Commerce in a US heartland state – to the benefit of citizens and business alike – and which set an example of good administration amazingly free of corruption. As one might expect from these circumstances, Emilia also led the nation in voter turnout, which has always been strong by US standards.

    So what happened here three days ago? The lowest voter turnout ever seen in the region … lower by nearly half compared to the previous regional elections in 2010 (38% vs. 68% turnout).

    The late PCI merged years ago into the “center-left” Democratic Party (PD), which is about as “left” by Italian standards as its US namesake is by US standards. The left wing of the PD has been vigorously but uselessly resisting the neoliberal “reforms” being pushed by the PD prime minister, Matteo Renzi, whose resumé and actions as PM bear amazing similarities to Barak Obama’s (though not quite so obviously in thrall to Wall Street-like interests). Here, as in most other European nations, there is no major national party that advocates clear alternatives to the Eurozone’s neoliberal austerity (es., fiscal sovereignty) without coupling it with stridently right-wing or xenophobic overtones, and many Emilian voters are repelled by such positions.

    So whadda we got to vote for at the polls? Your choice of TINAs, with minor tribal differences. (Beppe Grillo’s much-hyped 5-Star Movement has never effectively advocated for any clear, detailed economic policy and its behavior has been frequently bizarre, so not many see it as a viable governing alternative, though it did come in 3nd in Emilia).

    Of course, the PD promptly sent out its loyal TV talking heads to explain away the Emilian abstention with a variety of reasonable-sounding explanations, but most less-partisan observers I’ve heard seem to feel that the voters stayed home because there was nothing on the ballot they wanted to vote for. If the EU continues to come up with merely Potemkin “New Deals” like this, we can expect ever more citizen disaffection with European political institutions, top to bottom. As you say, it ain’t gonna be pretty.

    1. Yves Smith Post author

      This is very informative, and thanks for the political backstory. One of the frustrations of having to cover so many topics in the post-crisis era, as the ripple effects keep widening out, is sometimes missing key events that influenced how bad (or once in a while not so bad) various political and policy measures turned out to be. This is particularly true on the Eurozone, which is both critically important yet difficult to cover well due to the complex dynamics among member states.

    1. proximity1


      I was thinking only a day or two ago about the Titanic‘s sinking as a metaphor and how, if it happened today, it would go differently.

      Unlike then (1912), the Titanic , owned by a private equity firm, would go down this way:

      After strilking an iceberg, the ship’s crew would be ordered to circulate and reassure the first-class passengers that all was well and that they ought to remain in the bars and dining rooms or, if not there already, congregate there. Then, the senior officer crew would loot the staterooms of the wealthiest passengers, load their booty onto lifeboats along with as much as they could take of the ship’s movable treasure, and, once aboard all the lifeboats, the officers would steal into all available lifeboats, and those loaded with their spoils, and row away, after having sent distress signals for their resuce, leaving the remaining passengers and crew to drown as the ship sinks.

  4. not_me

    History is unlikely to look kindly on anyone in a policy position now. Yves Smith

    History will certainly look unkindly on anyone who supports government subsidies for private credit creation. Why? Because it’s a non-starter, morally speaking. Government is force and that force is acceptable because it is to be wielded for the general welfare* ONLY. OTOH, the private sector is supposed to be voluntary cooperation ONLY. Mixing the two, government and the private sector, degrades both of them and is, by definition, corruption.

    * “General welfare” can easily include welfare for the poor but never for the rich.

    1. NOTaREALmerican

      Good point. It’s also explains why the infrastructure “stimulus” works the 1st time (say, the New Deal) but with each repetition the benefits seem to go to few and few people resulting in the infrastructure “stimulus” turning an infrastructure scam.

      Over the various “plays” of the “Stimulation Game”, the smart-n-savvy people figure out how to get more-n-more “stimulation”.

  5. Alcofribas

    The “New Deal” words seem to be wrong. Because you can lead a new deal when a public pilot exists, and EU is not a federal state but a private club of 28 heads of governments of State members.
    This Juncker’s plan is nothing else than a continental Private-Public Partnership, in which private states projects will be financed by their private lobbies, while warranties of ROE given by european institutions, and so european citizens. Clearly a shame as european citizens already captive with many local insane PPP, and will now also be captive of continental ones.
    Both egoistic states members sovereignties and their favorite lobbyists interests can win something. At the first rank stand financial ones, of course. No real continental overview, development scheme, european citizenship consciousness are to be mobilized. In the dark pool of European Council secret negociations go on. Both EU institutions and 28 governments are quite unable since 1992 to be real states. Because tax, budget expenses and money policies aren’t hold in the same hand to be a true one. In crisis times, the general interest of 510 millions of people cannot be protected by such a neoliberal architecture of powers. Ok, states members have to be federated now, but EU is a non-State, and there stand the problem that neither M5S or Podemos or Syriza can address. Yes Alternative für Deutscland, Front National, Ukip, aso. are taking off seriously.
    Is Europe poor ? Not at all, it still remains the richest part of the world. But don’t forget that here only common people and small entreprises pay taxes : global firms don’t pay, thanks to the tax competition between states members, thanks to many taxes paradises and offshore finance places. What could be a federal european budget with the end of this undemocratical situation ? Something between 2.000 and 3.000 billions euros, I guess (do you know strong studies about that ?).
    Not only recession could have been fully avoided (where is speculation about the US public debt since 2007 ?), but we could also be something else than a children group of negociators with PRC or USA in order to reform IMF and UNO in a Stiglitz’s report way. Climate changes, not finance nor our old-fashioned political elites : 28 heads for one body make a monster, not the needed responsible Europe, for the european people and for a better world.
    Everywhere, common citizens are hostages of very low level politicians in our so called democracies. Chinese government cannot be a model, because hardly refusing democratic principles, but in the other hand, it now appears to be as the sole global regional power to know that stability is a huge thing to keep citizens confident with their representative powers.

Comments are closed.