BlogSpot - November 24th, 2014
The uncertain investment plan
The leaked investment plan—With investment trending down in the euro area (Guntram Wolff), the Juncker’s forthcoming €300bn investment program, called “Invest in Europe,” is gathering a lot of attention. Details are emerging. The FT (hat-tip EuroIntelligence) describes it as a massive collateralized debt obligation, with a built-in leverage factor of 10, i.e., the EU or the EIB put up to €30bn to fund a first-loss tranche, as a loss guarantee to attract private funding, to raise a total investment financing of €300bn. Bloomberg writes that loans, lending guarantees and stakes in equity and debt will be part of its toolbox, with the goal to jumpstart private risk-taking so that stalled projects can get off the ground. The WSJ writes that the plan represents a shift in how the EU uses structural funds, as Mr Juncker's plan would use the money to leverage investment funding from the private sector, absorbing most or all of the initial losses in a project in which it co-invests with the private sector. FAZ reports that member states will be able to choose how they want to contribute to, for examples through their own development banks like the KfW in Germany and will be managed by the European Investment Bank. A technical assistance program comes as a complement to identify projects of interest to private sector investors, and a road map to clear regulatory hurdles.
Already met with criticisms, given the lack of new financing—Spiegel reports that Juncker’s proposal to boost EU growth by attracting private investments through loss guarantees met with harsh criticism—as it means more debt for EU member states. The WSJ writes that the EU initiative will be greeted with skepticism, as EU leaders in 2012 agreed to a "Compact for Growth and Jobs" that was meant to spur EUR180bn of total public and private investment by boosting the EIB's capital by EUR10bn, which has not made a dent in the investment shortfall. For Jan Strupczewski (Reuters), the program risks becoming an exercise in financial engineering rather than a conduit for the new money the region needs to help boost output and create jobs. If it does raise new financing, the plan could provide an additional 0.7 percent of GDP in investment per year over three years. But if it uses high leverage, with little new money, its impact will be limited. EuroIntelligence writes that to make the program work, the ECB would need to be able to buy into these assets, and thus essentially monetize the investments. Daniel Gros (CEPS) advises to re-focus economic policy toward consumption rather investment because the fall in potential growth in the eurozone means that the investment gap has actually decreased during the crisis.
Sizeable alternatives—EuroIntelligence explains that alternative ideas regarding Juncker plan have been proposed within the European Parliament. The ADLE group (Alliance of Liberals and Democrats for Europe) is in favor of more ambitious plan to fill the current investment gap (€700bn), which would be under the EIB supervision, by fostering private funds. The S&D (socialists and democrats) support a public/private investment mix as part of a €500bn plan for ‘investments in the transition towards a sustainable and resource efficient economy’, as reported by the European Trade Union Institute.
The German hurdle—Marcel Fratzscher (Project Syndicate) criticizes Germany for not supporting the European investment agenda (one of four Neins—on a more active fiscal policy elsewhere; on an EU-level investment program; on allow a fiscal drift at home; and on QE), and encourages the country to trade off deeper reforms in France and Italy in exchange for more time to consolidate deficits. In Welt, he insists that to maintain a well-performing economy, Germany needs more investment.
G20: structural reform as the only policy tool?
Faced with the challenges of secular stagnation, crisis legacies and low potential growth the Brisbane G20 Summit (November 15-16 2014) focused on what seemed like the only policy tool left, structural reforms, drawing up the Brisbane Action Plan, and falling short of a deep rethinking of policy making, as reported by Eurointelligence. Linda Yueh points out that funding for the reforms remains uncertain, while Robert Peston is skeptical about the estimate $2tn income gain.
The final G20 communiqué provides a set of 800 measures to strengthen economic growth by at least an additional two per cent by 2018. The OECD supported the implementation of structural reforms, especially in times with reduced fiscal and monetary margins, while the IMF emphasized the need to pursue efforts on (1) infrastructure investment, (2) trade integration and (3) financial regulation and international taxation.
Eurointelligence deplores another pointless G20 Summit, with structural reform projects that cannot be accounted for ex-post. Oxford Analytica emphasizes the lack of details on reforms. Larry Elliott (the Guardian) questions the actual commitments, showing examples of “empty promises” (the absence of numerical carbon emissions targets, the lack of new financing for Ebola, or of measures to address tax evasion). Increasing protectionism among G20 countries despite commitment to free trade is another example of weak global policy coordination on key issues, given by Simon Evenett (VoxEU) using data from the latest Global Trade Alert report.
The focus on the supply-side reforms is criticized. Richard Wood (EconoMonitor) argues that because of low aggregate demand, supply-side policies could actually hurt employment, depress demand further, and put further downward pressure on prices.
According to Jim O’Neil and Alessio Terzi (Bruegel), managing global imbalances and financial instability requires a new revamped grouping of the G20 and G7. With more representatives, these forums would be more effective to address global challenges and to enhance coordinated policy making.
The Short View... The non-binding vote in Catalonia
A non-binding poll for the independence of Catalonia collected 80% of positive votes (as reported in the NYT), but with less than 40% participation rate… leaving the question open, including on a potential exit from the EU.
By Aurélie Rigaud & Paul Raso
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