Published in Business Spectator (Melbourne), 9 October 2014
It may be hard for Jean-Claude Juncker, the designated President of the European Commission, to put together his team of commissioners (The joys of forming a European government, October 2). But at least Juncker has a clear idea what he wants to do once he is finally in charge of European Union policy.
Before his election by the European Parliament in July, Juncker presented a ten-point plan as the personal manifesto of his presidency. His first priority was to “provide a boost to jobs, growth and investment”. After paying lip service to the truism that one cannot “build sustainable growth on ever-growing mountains of debt”, he then promised to “mobilise up to €300 billion in additional public and private investment in the real economy over the next three years.” Ever since, observers have been wondering where this impressive sum is going to come from.
In his ten-point plan, Juncker only vaguely refers back to the EU’s own budget and the European Investment Bank. However, the EIB’s balance sheet total is just over €500bn, and the EU’s annual budget is roughly €142bn. Therefore to mobilise an additional €300bn would not be easy to shoulder for these two institutions on their own. Actually, it would be impossible if Juncker was serious about his pledge not to debt-finance his pathway to growth.
Of course Juncker is not serious about his proclaimed aversion to debt finance and thus he is looking at ingenious ways to fund his €300bn stimulus programme. Which European institution is large enough to enable such a spending spree? You may have guessed it: Europe’s very own bailout fund, the so-called European Stability Mechanism.
Established in the stormy days of the euro crisis, the ESM was meant to provide emergency funding to EU member states facing a potential default on their debt. To achieve this, €80bn in cash was paid into the ESM by European governments, the remaining €620bn of this €700bn institution are credit guarantees.
Thanks to the interventions by the European Central Bank, which calmed down nervous markets, the ESM was not required to pay out huge amounts in the first couple of years of its existence. Just under €50bn was needed to bail out Cyprus and stabilise the Spanish banking sector, which leaves a substantial amount of money within the ESM – money that Juncker apparently has his eyes on.
To be clear, there is no stack of cash sitting anywhere in Europe that could be mobilised easily. Any funds the ESM wants to pay out, it first needs to raise itself. It could not use its cash reserves either because they are needed to guarantee the ESM’s own credit worthiness and investment rating.
Regardless of such technicalities, Juncker’s plan is to utilise parts of the ESM to finance his stimulus program. Little wonder, then, that those countries underwriting the ESM are not too happy about the idea.
The German government has publicly rejected any move away from the ESM’s original purpose to provide an emergency framework for struggling European governments. German finance minister Wolfgang Schäuble left no doubt what the ESM was for and what not: “The ESM is there not to be used, and it is there to create trust,” he recently explained.
The Germans also point out that the ESM was never meant to fund road building and other infrastructure projects but to prevent a financial meltdown. Fair enough. But at least initially it was not meant to bail out the Spanish banking system either but only insolvent European governments. Questions of original intentions or legality have never mattered much when big EU projects had to be undertaken. So perhaps it was a wise decision by EIB’s President Werner Hoyer when he reportedly tasked a working group with identifying projects his bank might undertake once given access to additional funding.
For those legal purists who feel queasy about abusing the ESM to finance the EIB in order to fund the European Commission, economics commentator Wolfgang Münchau recently presented an even better proposal in one of his columns. Why not let the ECB finance the stimulus program?
Münchau’s proposal may sound rather absurd at first, but it could be workable. The plan is simple: Juncker would issue a €300bn bond and sell it straight to the ECB. Under normal circumstances, one would call this government financing by a reserve bank, and the ECB is not allowed to do that for any eurozone country under the ECB’s mandate.
However, the Commission is not a national government and thus, technically at least, this is not monetary financing. Even better, since the eurozone is heading towards deflation, Münchau argues the newly created money might not even show up in rapid price hikes.
Voilà! There is a fresh idea with which to revive the eurozone, fund the Commission, stimulate the economy, prevent deflation, preserve the capacity of the ESM and keep everyone happy, maybe even the Germans. Just let the ECB take care of the EU’s budget, finance giant infrastructure projects to employ the lost generations of Italy, Spain and Greece and allow Jean-Claude Juncker to assume his new role of traveling around Europe and cutting ribbons.
If any of that strikes you as absurd, you are right of course. But then again, it is not that much more implausible than taking non-existent money out of the ESM to fund the EIB.
Juncker has not even started his new job as President of the European Commission yet and he is already showing why there was so much resistance to his appointment, particularly in economically liberal and conservative circles. In the pursuit of his policies, he is free of any guiding economic principles and indifferent to legal constraints. This makes it possible for him reject growing mountains of debt while simultaneously looking for ways to leverage the ESM for his purposes.
With Juncker at the top, the EU is bound for a wild ride over the coming years.
