It is time for the ECB to purchase EIB bonds: Bruegel’s Guntram Wolff sides with our proposal

recovery photoThe ECB’s recent dalliance with QE-light is macro-economically irrelevant. For a long while we have been arguing (see Policy 3 of the Modest Proposal) that it is high time that the ECB buys en masse EIB bonds, thus enabling the EIB to issue new bonds as part of a European Recovery Program; an investment drive that will mobilise the glut of idle savings, neither adding to public debt nor inflating financial assets (or, indeed, the fear of fiscal transfers from the core to the periphery). It is the optimal strategy for defeating deflation and whipping up growth without inflating asset prices. It was with pleasure that we recently read Guntram Wolff’s article which seems to endorse this proposal.

The idea is simple:

  • Europe desperately needs growth-inducing, large-scale investment.
  • Europe is replete with idle cash too scared to be invested into productive activities, fearing lack of aggregate demand once the products roll off the production line.
  • The ECB wants to buy high quality paper assets in order to stem the deflationary expectations that are the result of the above.
  • The ECB does not  want to have to buy German or Italian or Spanish assets lest it it accused of favouring Germany or Italy or Spain etc.

Here is what the ECB could do to achieve its objective while overcoming both its ‘operational problem’ and the ‘macroeconomic concern’ above:

  1. The European Investment Bank (EIB) and its smaller offshoot the European Investment Fund (EIF) should be given by the European Council the green light to embark upon a Pan-Eurozone Investment-led Recovery Program to the tune of 8% of the Eurozone’s GDP, with the EIB concentrating on large scale infrastructural projects and the EIF on start-ups, SMEs, technologically innovative firms, green energy research etc.
  2. The EIB/EIF has been issuing bonds for decades to fund investments, covering thus 50% of the projects’ funding costs. They should now issue bonds to cover the funding of the Pan-Eurozone Investment-led Recovery Program to the full; i.e waving the convention that 50% of the funds come from national sources.
  3. To ensure that the EIB/EIF bonds do not suffer rising yields, as a result of these large issues, the ECB ought to step into the secondary market and purchase as many of these EIB/EIF bonds as are necessary to keep the EIB/EIF bond yields at their present, low levels.

The merit of this proposal is that, essentially, it recommends that the ECB enacts QE by purchasing… eurobonds; as the bonds issued by the EIB/EIF are issued on behalf of all European Union states. Thus, the operational concern about which nation’s bonds to buy is alleviated. Moreover, the proposed form of QE backs productive investments directly, as opposed as to inflating risky financial instruments.

Indeed, as Guntram Wolff argues, in his article “…borrowing by the EIB has no implications in terms of European fiscal rules. It is recorded neither as new debt nor as a deficit for any of the member states, which means that new government spending could be funded without affecting national fiscal performance.” Additionally, Wolff offers a convincing answer to the question of where the EIB will find shovel-ready projects worth hundreds of billions of euros to fund: “It will be impossible to define new and sensible European projects worth €200 billion per year. Common projects such as the European energy union will need more time to be precisely defined. As a result, the bulk of investment now will have to come from national policymakers. In part, this means that existing infrastructure projects that are supposed to be financed from national budgets could be funded by the EIB. By removing some of the burden from national budgets, the current decline in public investment could be reversed.”

This is eminently sensible. A European Recovery Program of such magnitude would, suddenly, remind the EIB that it has the (hitherto unrealised) capacity to become macroeconomically significant; to endogenise investment risk while reducing it; to diminish the riskiness of the investment projects that it takes on simply through playing a larger role in Europe’s recovery (and therefore stemming the forces of deflation that beget more frequent bankruptcies and higher risks).




17 thoughts on “It is time for the ECB to purchase EIB bonds: Bruegel’s Guntram Wolff sides with our proposal

  1. “Η Ελλάδα της κρίσης αποδίδει μια οικονομία βομβαρδισμένη και μια κοινωνία διαλυμένη. Και το ζητούμενο δεν μπορεί να είναι άλλο παρά η ανοικοδόμησή της και η ανόρθωσή τους. Έπ’ αυτού ελάχιστα λέγονται και ακόμη λιγότερα γίνονται.

    Ωστόσο σύντομα η ελληνική πολιτική τάξη, δεξιάς, κεντρώας ή αριστερής προέλευσης, θα διαπιστώσει ότι δεν υπάρχουν πλέον παρά περιορισμένοι βαθμοί ελευθερίας στην άσκηση της οικονομικής πολιτικής. Είναι η θέση της χώρας τέτοια, είναι οι δεσμεύσεις που ανέλαβε έναντι της διάσωσης που εξασφάλισε εντός του ευρώ τόσο μεγάλες, που δεν επιτρέπουν μεγάλα λόγια και υποσχέσεις εκ των προτέρων ανεκπλήρωτες.

    Θα αποδειχθεί γρήγορα ότι δανειστές και εταίροι δεν πρόκειται να ρυθμίσουν τα χρέη μας αν δεν αποδεχθούμε για χρόνια σταθερά δημοσιονομικά πεδία, τα οποία δεν θα επιτρέπουν μεγάλες αποκλίσεις από τις αρχές των ισοσκελισμένων προϋπολογισμών.

    Οι κυβερνήσεις θα έχουν πολύ μικρά περιθώρια κινήσεων. Η δημοσιονομική τους ελευθερία θα κινείται μεταξύ ισοσκελισμού και ελλειμμάτων 0,3% έως Ο,5% του ΑΕΠ. Και στην εκδοχή των πρωτoγενών πλεονασμάτων οι τιθέμενοι στόχοι θα είναι διαπραγματεύσιμοι μεταξύ 2% και 3% του ΑΕΠ. Με άλλα λόγια η χρηματοδότηση δημόσιων καταναλωτικών, αλλά και επενδυτικών δαπανών δεν μπορεί να γίνεται με ελλείμματα παρά μόνο με περισσεύματα.

    Πράγμα που σημαίνει ότι μια κυβέρνηση αν θέλει υποτυπωδώς να σταθεί στον πλευρό των πολιτών θα πρέπει να διατηρεί χρηστή διαχείριση και να επιβεβαιώνει κάθε τόσο την εισπρακτική αποτελεσματικότητά της.

    Σχεδόν ταυτόχρονα η εγχώρια πολιτική τάξη θα διαπιστώσει σύντομα ότι χάνει ένα ακόμη εργαλείο αυτονομίας στην άσκηση οικονομικής πολιτικής.

    Από την Κυριακή και μετά οι ελληνικές Τράπεζες περνούν στην εποπτεία της Ευρωπαϊκής Κεντρικής Τράπεζας. Η Τράπεζα της Ελλάδος χάνει την εποπτεία και κατ’ επέκταση τον έλεγχο της ρευστότητας, ενώ η πολιτική τάξη δεν θα μπορεί να επεμβαίνει στην οικονομία μέσω του πιστωτικού συστήματος.

    Παλαιότερα κάθε νέα κυβέρνηση είχε στα χέρια της την Εθνική, την Αγροτική, το Τ.Τ. και άλλες μικρότερες κρατικές Τράπεζες μέσω των οποίων ασκούσε πολιτική, διέθετε χρήματα για διάφορους σκοπούς, μπορούσε να παρεμβαίνει μέσω παράλληλων μηχανισμών στην οικονομία.

    Τώρα κι αυτό το εργαλείο περνά σε έλεγχο και κανόνες τρίτων.

    Οπότε το πολιτικό σύστημα που δεν θα μπορεί να μοιράζει παροχές, ούτε χρήμα, θα πρέπει να αναθεωρήσει το ρόλο του, να αλλάξει σκοπούς και προτεραιότητες, να μεταβληθεί σε σχήμα πραγματικού οργανωτή και καθοδηγητή της κοινωνίας.

    Πράγμα που σημαίνει ότι πρέπει να αλλάξει δομή λ ειτουργίες και περιεχόμενο.

    Οι εποχές που ασύνταχτα ένα κόμμα μοίραζε υποσχέσεις και ευχολόγια έχει περάσει οριστικά και αμετάκλητα.

    Η τρέχουσα πολιτική τάξη πρέπει να βρει το κουράγιο να αλλάξει, να μετασχηματισθεί και να αποδώσει σύγχρονους μηχανισμούς, ικανούς να προσφέρουν πραγματικά στην ανοικοδόμηση και ανασύσταση της χώρας.

    Αλλιώς δεν έχουν καμία τύχη.

    Θα τους ξεράσει η Ιστορία, θα τους τελειώσει η σύγχρονη κοινωνία, που μετά όσα πέρασε δεν θα ανεχθεί ευκολίες και πέτσινες υποσχέσεις.”

    Source: TO BHMA commentary

    • A terrible article in a formerly good newspaper. It is simply untrue that the nexus between the local bankers and the political class is broken because of the ECB’s supervision. A grand lie.

    • I thought the point of the opinion piece was how little maneuver room is left in budget performance and how much Greece is now fiscally governed from outside its borders. The part about the ECB bank control is kind of secondary. The Greek banks are still owned by the state, about 80% state ownership. Who controls them is kind of irrelevant. When will the state be reimbursed for the worthless shares it holds of the Greek banking sector is a far more serious question.

      Another strong point about the article is that Syriza has no tools to do anything other than absorb blows which are almost guaranteed to come if Syriza attempts a renegotiation even as a joke. There is no room for renegotiation = key article point.

      Have I misread it?

  2. Hi Yanis,   China’s economic slowdown is in the news. Maybe some lessons can be learnt from General Electric’s experience. Size matters. At critical mass, consistently high growth becomes unachievable. Please read my new blog entry at “The Tale of Two Growth Stories: General Electric and China”  

  3. Eff the EU. No need to subsidize German and French free loaders.

    Losers Additional sum to pay
    United Kingdom


    • This is great News. There are only two possible outcomes. Either (A) the EU sticks to ist own rules and the UK has to pay or (B) the EU breaks its own rules.

      (A) will lead to an even sooner exit of the UK, which them will lead to Exit discussions in more Northern countries, since noone wants to stick around with the bankrupt, uncompetitive socialist South.

      (B) will lead to even more loss or credibility of the EU.

      So there is hope that the EU will even sooner be something we do not need to worry about.

    • The sooner the eurozone implodes the better. If UK wants to pull the trigger then it is more than fine with me.

      No one cares about the credibility nonsense. EU = Emblematic Urinal as far as I am concerned. Eff the EU and anything associated with it.

  4. While it is good to hear that this money-printing venture would be aimed at carrying real-world, job-creating, concrete projects (unlike the utterly corrupt QE), I would still want to hear more specifics about the projects to be carried out.
    Doing projects just for the sake of doing projects simply leads us back to the granddaddy bubble land of them all, Abeland.

  5. Pingback: Links 10/24/14 | naked capitalism

  6. “Europe desperately needs growth-inducing, large-scale investment.”

    Sensemaking ones, I hope. Like what, a bullet train from Athens to Berlin, maybe?

    BTW: since the reunification, Germany’s west tansferred ~2 trillion euro to Germany’s east. Net. About one third of this, 700 billion euro, went into ‘growth-inducing, large-scale investments’. Unfortunatley, to no avail. East Germany is still far below the economical strength of West Germany.

    Point is, as I said since years: one has to accept that some regions simply can’t achieve on their own the standard of living other regions have, for a whole lot of reasons. So there are two possibilites: 1) accept this fact of nature or 2) transfer limitless and endlessly huge amounts of money. Which of course make the donors poorer. But hey, there are many more on the receiving end of this land of milk and honey than payers, they have more votes in the ECB and the eurozone so they can more or less do as they please and can claim: it’s democracy, stupid. Except it isn’t: the eurozone is rather a shrill form of socialism.

    • VSS said it all.
      Europe does not need a large scale investment scheme.For if there were projects worth the while of investing on them, the always wise private sector would have invested already.Never mind that the private sector’s leverage condition is far worse than the public sector.
      This never makes the news so who cares really?
      Europe has already all the projects it needs.The absence of private investment is simply evidence of this.This is the end.We’ve reached the technological singularity.

      My suggestion to EIB: If you ever decide to run a scheme like the one above, you should inject all the money into enhancing the population’s economic literacy.

    • You are making calculations without the inn-keeper. The inn-keeper says “you are already evicted. Pack up you miserable German belongings and go.”

    • “if there were projects worth the while of investing on them, the always wise private sector would have invested already”


      In addition why would I invest one private Cent into the EU, where I have no guarantees that rules are changed within hours, if I can invest my money somewhere else?

    • The scientific community should try to explain how is it that some people perceive sarcasm as reality.

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