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.