European growth compact; or how to turn a molehill into a mountain

11.05.2012 - 10:35

Over the past 4 years we have been in economic crisis mode non-stop. At first it seemed that the financial crisis - the start signalled by the fall of Lehman Brothers - would be just that: a financial crisis in the financial world. But it soon became clear that for banks to survive this crisis, especially in Europe, help was needed. And that help came from the taxpayers in the form of massive public guarantees for banks that all of a sudden all seemed to be too big to fail.

A multitude of national governments did their utmost to defend the savings of its people (mostly up to €100,000), with one country - Ireland - even going so far to guarantee all savings. And this in a time of already declining economic growth and in countries that had run up budget deficits for years. Already in 2003-2004 the French-German tandem that normally rules the EU decided that the rules of the stability and growth pact were too tight and decided unilaterally to ignore them for a while. We have all seen that only a couple of years later - and of course with the above mentioned financial crisis - government finances in Eurozone countries began to run out of control.

Europe's answer so far has been to cut public spending in an attempt to bring debt levels to reasonable proportions. This has become known as the austerity drive. But now that already 3 Eurozone countries are dependent on the financial drip of the EU and the IMF, and seemingly not really getting out of trouble despite of it, people are starting to look for an answer elsewhere.

Perhaps austerity alone was not the answer to all our troubles. The Spanish economy is showing at the moment that by cutting drastically public spending it has also run its economy into the ground. And, in fact, the contraction of the economy worsens the problem as debt levels are defined as a percentage of the GDP. With a shrinking GDP and a stable, if not growing, debt level one need not be a rocket scientist to see that these percentages will rise. And thus it became clear to all, that either certain countries would not pay back their debt in full - thus default, orderly or not - and/or get some economic growth or indeed just inflation to make the percentages look better.

Now, default is a dangerous business, money markets do not like it and will be very reluctant to finance you in the future. And inflation as we all know is a four-letter word in Germany ever since it went slightly off the tracks in the 1920s, thus leading to economic and then political turmoil, culminating into Fascism and World War II. So one can understand a certain German reluctance to answer the calls from, amongst others Nobel laureate Paul Krugman, who has been advocating an easing monetary policy for quite a while now, taking in the chance of increased inflation. His polite calls to do so have turned in the last couple of months to an almost violent and at least loud crusade against austerity. As he is a prolific writer his more and more passionate pleas can be read in all major US and European papers at least 3 times per week.

To give him credit (sic) his plea is not so much for inflation but for economic growth as the only answer to the current debt problems. And over the past months others have also been advocating this. In fact no one, it seems, is against growth. Even Chancellor Merkel is very much in favour of it, and is every time delighted when the German economy keeps growing when all the others don't. But only if that growth does not come from Keynesian spending, as she is opposed to that, or at least claims to be so to keep her Liberal coalition-partner on board.

And now France has a President who has made growth his central theme, and who doesn’t see Keynes as the devil incarnate. And now European Council President Herman van Rompuy has called for a special EU summit to talk about growth. And apparently not just talk about growth, but actually do something. The Spanish daily El Pais claimed a scoop two weeks ago when it wrote that the EU was working on a growth-plan worth some €200bn! It did not give much details but said that one of the cornerstones of the plan is to stock up the funds of the European Investment Bank (EIB) so infrastructure projects, green energy and innovation could be stimulated. In his letter to invite the 27 to this extra summit to be held on 23 May, Van Rompuy also hinted at something like this.

The Dutch government claims he mentioned an amount of €180bn. A sizeable sum one would say and indeed, if it were true, it would mean over €10.000 to get each of the 17.4 million unemployed in the EU back to work. But the reality is alas different it seems. In fact it is proposed to give the EIB €10bn extra and that is about it. But so they reason, this €10bn will raise the EIB funds to €60bn and normally EIB money triggers off investments - from private investors, but mostly public money from the governments where the projects are implemented. And it is customary to say that one can multiply the EIB funds by a factor 3 as the actual investment on the ground. And thus now they will say on 23 May: 3X€60bn=€180bn. Hurray! It makes Christ's feeding of the 5,000 with just five loaves and two fishes look like child's play compared to this miraculous multiplication of European funds.

But unfortunately, these EIB funds will not be matched by public money from the receiving countries as these countries have no public money to spend. And private investors are worried sick they do not get the funds refunded they have lent to the governments and thus private investors are not willing to take any risk at the moment. And therefore it may be very well that the European growth compact will be just €10bn extra EIB money and that's it. The Irish government at times cuts more than that in a week.

I am afraid that the emergency exit has not yet been found for our problems. Oh, and before we forget. Remember the financial crisis from 2008? That came about because of unregulated banks and financial tricks. And guess what? We still have not regulated them. So please sleep with one eye open, disaster is still looming.