Juncker’s 300

It seems that around two thousand projects have been presented, amounting to 1,300 billions. But, at the origin, the available resources of the plan amount, at best, to 21 billions.

Do you remember the "Compact for Growth and Jobs"? You don’t? Yet slightly more than two years ago the Euro-group decided the compact (28-29 June 2012). In the initial declaration European leaders express “their determination to stimulate smart, sustainable, inclusive, resource-efficient and job-creating growth”; vaste programme, would said De Gaulle. But they also remember the importance of “having sound public finances and make structural reforms”; in cauda venenum, poison in tail. After indicating a panoply of investment objectives, it was decided to increase the capital of the European Investment Bank (EIB) of 10 billions, which will increase the financing capacity of 60 billions, which in turn will give the push "up to 180 billions additional investment." Not too bad this multiplier, potentially amounting to 18 times; unfortunately the 60 billions, let alone the 180 ones, vanished.

The EIB's website today does not provide information on the compact, but enthusiastically announces 21 billions of the new President of the Commission, which should have a multiplier, over three years, of 15, bringing additional investments (sic) to 315 billions. Just these data should lead to believe that the new program will end up like the previous one, but you can add some other considerations. In fact, the 21 billions are not new: it is an amount of 15 billions already in the Commission’s budget; that is resources already established for investment programs. Just add 6 billions from the EIB, passing from the Bank’s capital to the new European Fond for Strategic Investment (EFSI), who should manage resources and get the miracle.

But the EFSI will not have Jesus ability; also because it will behave as it has always behaved the EIB; choose investments without much risk and with high monetary returns, as would any private investment fund, being very careful to maintain the AAA rating. It seems that around two thousand projects have been presented, amounting to 1,300 billions. But it is likely that most of them will not fit in the required characteristics. For example in Italy the safety of the territory is definitely a priority, and one do not need to do a cost-benefit analysis to understand that the social return on investments in this sector is among the very high (also calculating the savings on interventions needed after floods, landslides, earthquakes and other disasters). But neither the first nor the EIB or EFSI would consider such investments.

Perhaps the most curious aspect is the possibility for individual States to make voluntary contributions to 'EFSI. It seems that these contributions, for the great kindness of frau Merkel, will not count in the rules of the fiscal compact. However, the fact that a country makes a volunteer payment does not imply that the resources will be made in favour of the projects presented by the country: not ever! It would be a way of going around the rules on the budget, taking away some investment expenditures. No, the investments will be decided by an independent board, whose members have to speak in German. Any person who knows a minimum of game theory, and in particular the prisoner's dilemma, can guess that with this kind of rules the EFSI will receive no additional resources.

The most puzzling thing is that there are 500 billions at the ESM that could be used to equip the EFSI of resources with which finance not only Juncker’s 315 billions but twice. In addition, the QE, to which Draghi is slowly pushing the ECB, with the announced opposition of the Bundesbank, could very well provide for a purchase of several hundred billion of securities dell'EFSI. Finally a part, only a part, of the gold in the hands of the central banks of the Eurozone could be placed  as guarantees by EFSI, for a total of a hundred billion.

Moreover there is PADRE (Politically Acceptable Debt Reduction in the Eurozone), the proposal made by Pierre Pâris and Charles Wyplosz, similar to a proposal by Mario Nuti (see Insight PADRE - The scheme to cope with the Eurozone public debt ). PADRE suggests the mobilization of the seigniorage of the ECB, to purchase of public debt securities of all countries shareholders of the ECB, in the proportions of their actions. In this way, even a possible default would not entail a transfer union, the German saver’s obsession.

But of course nothing will be done about it. The point is not the lack of confidence of German public opinion (and that of other countries of northern Europe). Certainly there is no trust, but that is used to make popular among the public an economic line that has a specific goal. Germany does not want investments, or any revival in domestic demand. The European right has taken advantage of the Greek case, exploded in 2010, to produce an attack at the welfare expenditures and at the labour legislation. The reduction of public expenditure and the full flexibility of labour market must be pursued so that the adjustment in competitiveness is obtained with the reduction of wages per unit of output. The lower you set the wages, the less the need to expel workforce. Or for the same wage workers have to work more hours; but this is possible only in the export sector, the only one with a positive trend (over the last four years, the export growth of the Eurozone countries was, on average, 34.8%).

This goal is consistent with the export-led economic system that Germany proposes as a model to all European countries. The export-led system needs a substantial surplus in the trade balance, which also implies that domestic demand must be contained, because an increase in domestic demand, with equal exports, implies higher imports and therefore less surplus. Indeed, as the percentage of import is higher with consumption than with investment, consumption has to be controlled, hence the household disposable income; ultimately therefore the level of worker’s remuneration.

The model to be pursued is that of Spain; Mariano Rajoy is the best student of the European Commission; having fully liberalized labour market, dropped the wage rate, and decreased by four points the wage share of GDP, the Commission is benevolent towards the non-compliance of the Spaniards to the deficit and the debt. It is true that Spanish exports have grown more than the European average (39.3% versus 34.8%). But Spain is not Ireland, and it will not be the export-led model to allow a path of stable growth.

Ruggero Paladini

Economist - Professor of "Scienza delle Finanze" at University "La Sapienza" Roma; Member of the Economic Board of Insight - ruggero.paladini@uniroma1.it