In principle the EU already has a recovery and convergence strategy in the European Economic Recovery Programme 2020. In practice this has been shredded by austerity. We propose that the European Union launch a new investment programme to reverse the recession, strengthen European integration, restore private sector confidence and fulfill the commitment of the Rome Treaty to rising standards of living and that of the 1986 Single European Act to economic and social cohesion.
The Investment-led Recovery and Convergence Programme (IRCP) will be co-financed by bonds issued jointly by the European Investment Bank (EIB)[v]and the European Investment Fund (EIF). The EIB has a remit to invest in health, education, urban renewal, urban environment, green technology and green power generation, while the EIF both can co-finance EIB investment projects and should finance a European Venture Capital Fund, which was part of its original design.[vi]
A key principle of this proposal is that investment in these social and environmental domains should be europeanised. Borrowing for such investments should not count on national debt anymore than US Treasury borrowing counts on the debt of California or Delaware. The under-recognised precedents for this are (1) that no major European member state counts EIB borrowing against national debt, and (2) that the EIB has successfully issued bonds since 1958 without national guarantees.
EIB-EIF finance of an IRCP therefore does not need national guarantees or a common fiscal policy. Instead, the joint bonds can be serviced directly by the revenue streams of the EIB-EIF-funded investment projects. This can be carried out within member states and will not need fiscal transfers between them.
A European Venture Capital Fund financed by EIF bonds was backed unanimously by employers and trades unions on the Economic and Social Committee in their 2012 report Restarting Growth. Central European economies (Germany and Austria) already have excellent finance for small and medium firms through their Mittelstandpolitik. It is the peripheral economies that need this, to build new sectors, to foster convergence and cohesion and to address the growing imbalances of competitiveness within the Eurozone.
The transmission mechanism of monetary policy to the periphery of Europe has broken down. Mr Mario Draghi admits this. He has gone on record to suggest that the EIB play a active role in restoring investment financing in the periphery. Mr Draghi is right on this point.
But, for the IRCP to reverse the Eurozone recession and stop the de-coupling of the core from the periphery, it must be large enough to have a significant effect on the GDP of the peripheral countries.
If EIB-EIF bonds are to be issued on this scale, some fear that their yields may rise. But this is far from clear. The world is awash in savings seeking sound investment outlets. Issues of EIF bonds that co-finance EIB investment projects should meet these demands, supporting stability and working to restore growth in the European periphery. We therefore submit that joint EIB-EIF bond issues can succeed without formal guarantees. Nonetheless, in fulfillment of its remit to support “the general economic policies in the Union”, the ECB can issue an advance or precautionary statement that it will partially support EIB-EIF bonds by means of standard central bank refinancing or secondary market operations. Such a statement should suffice to allow the EIB-EIF funded IRCP to be large enough for the purposes of bringing about Europe’s recovery.
Misleading arguments and unworkable alternatives:
- There are calls for bonds to finance infrastructure, neglecting the fact that this has been happening through the European Investment Bank (EIB) for more than half a century. An example is a recent European Commission proposal for ‘Project Bonds’ to be guaranteed by member states. This assures opposition from many of them, not least Germany, while ignoring the fact that the EIB has issued project bonds successfully since 1958, without such guarantees.[vii]
- There is no high-profile awareness that EIB investment finance does not count on the national debt of any major member state of the EU nor need count on that of smaller states.[viii]
- There is a widespread presumption that public investment drains the private sector when in fact it sustains and supports it. There is similar presumption that one cannot solve the crisis by ‘piling debt on debt’. It depends on which debt for which purpose, and at what rates. Piling up national debt at interest rates of up to seven per cent or more without recovery is suicidal. Funding inflows from global surpluses to Europe to promote economic recovery through joint EIB-EIF bonds at interest rates which could be less than two per cent is entirely sustainable.[ix]
- There is little awareness of the EIB’s sister organisation, the European Investment Fund (EIF), which has a large potential for investment funding of SMEs, high technology clusters and a variety of other projects, which it can co-finance with bonds, issued jointly with the EIB (see note 9).
Why aren’t the EIB-EIF doing this now?
Until the onset of the Eurozone crisis the EIB had succeeded in gaining national co-finance, or co-finance from national institutions, for its investments. But with the crisis annual EIB financing fell from over €82 bn in 2008 to only €45 bn last year. The EIF is a sister institution of the EIB within the EIB Group. EIF bonds issued from now could match EIB bonds without a treaty revision or an amendment of EIF statutes. Like EIB bonds, EIF bonds need not count on national debt or need national guarantees. The EIB would retain control over project approval and monitoring.
In sum, we recommend that:
- The IRCP be funded by means of jointly issued EIB and EIF bonds without any formal guarantees or fiscal transfers by member states.
- Both EIB and EIF bonds be redeemed by the revenue stream of the investment
- projects they fund, as EIB bonds always have been.
- If needed, the ECB should stand by to assist in keeping yields low, through direct purchases of EIB-EIF bonds in the secondary market.[x]
[v] Since gaining its social investment terms of reference from the European Council in 1997, the European Investment Bank quadrupled its annual lending to over €80 billions. But, despite the EIB’s more than half century of success there also are questions whether it can replicate this again without parallel support. For the EIB is highly dependent on investments in its bonds from pension funds which are statutorily obliged to invest only in AAA rated finance. It also has had a house rule, rather than a Treaty obligation, to seek co-finance for its investments either from national governments or national partners, both of which have been compromised by reactions to the Eurozone crisis since 2009. See below for our recommendation that an expanded investment-led recovery programme should be supported by legitimate ECB operations.
[vi] Some history: One of the main recommendations by one of us in 1993, in advice to Jacques Delors, was that Europe should establish a European Investment Fund to countervail the deflationary effects of the debt and deficit conditions of the Maastricht Treaty. The proposal was derailed in 1994, both because of vehement resistance from the Economy and Finance Directorate of the Commission and the resistance, then as now, of Germany to EU bonds. [See Stuart Holland (1993). The European Imperative: Economic and Social Cohesion in the 1990s. Foreword Jacques Delors. Nottingham: Spokesman Press, November.] But Delors managed to get the European Investment Fund established. In recent evidence to the Economic and Social Committee of the EU, both the Fund and the EIB confirmed that the EIF could fulfil its original design aim to issue bonds without a Treaty revision. The Economic and Social Committee then endorsed the principle that eurobonds could be adopted by ‘enhanced cooperation’.
[vii] Since the Lisbon European Council in 2000, the EIB has accepted a specific remit for cohesion and convergence. See European Investment Bank (2008). Fifty years of sustainable investment, Luxembourg.
[viii] None of the major EU economies, nor Greece, Portugal or Ireland count EIB funding as part of national debt. Nor need any others, since whether EIBfunding should be counted as part of national debt is a national decision by governments and their central banks rather than embodied in or needing amendments EU Treaties.
[ix] For two relevant sources see Creel J., P. Monperrus-Veroni & F. Saraceno (2007). Has the Golden Rule of public finance made a difference in the United Kingdom? OFCE Working Papers 2007-13. Paris: Observatoire Français des Conjonctures Économiques; and Creel, J., Hubert, P. and Saraceno, F. (2012). Should the Stability and Growth Pact be strengthened? OFCE blog. February 29th. Paris: Observatoire Français des Conjonctures Économiques.
[x] Note that such support would be entirely within the central bank’s remit and charter. It would not constitute fiscal financing (as the EIB and EIF are triple-A rated EU institutions) and the precise nature of means by which the ECB can support EIB and EIF bonds may be left to the ECB’s governing council to decide. For example, it can take the form of preferential haircut rates at the level of repo refinancing (something already discussed by the ECB’s governing board in relation to bundles of loans to the Periphery’s SMEs) or, indeed, direct purchases in the secondary markets.