The question posed in the title of today’s post is something that has applied to the Euro area over the past couple of years or so. A new entry in this category is being provided today by European Commission President Jean-Claude Juncker. I guess he will be grateful for anything which takes the media attention away from his involvement in the apparent tax avoidance and perhaps evasion scandals in Luxembourg whilst he was Prime Minister. Also I recall him conducting a joint press conference around 18 months ago with the then President Barosso where both told us that their priorities were economic “growth,growth,growth”. They then seemed to forget that as well as talk actions were required and of course since then the Euro area has seen very little growth.
One familiar theme in the Euro area is inflation of the number of acronyms and we now have yet another. The EFSI or the Economic Fund for Strategic Investment sounds rather grand does it not? They invariably do on paper it is the reality which disappoints as Cyndi Lauper put it “time after time”. So let us examine the details which have been officially announced this morning. There was as ever little shortage of hype and bombast.
today we are adding the third point of a virtuous triangle:………We need to send a message to the people of Europe and to the rest of the world: Europe is back in business. This is not the moment to look back. Investment is about the future……a grand bargain to put Europe back to work.
I have a vision of school children in Thessaloniki walking into a brand new classroom, decked out with computers.
With all that hot air he could heat the parliament building on his own! Also if we have a third point of a virtuous triangle we also need points one and two. Actually the hype is rather contradicted by this bit.
investment in Europe is not rebounding.
President Juncker thinks that national budgets are already overstretched.
Others say we need more debt. We do not. National budgets are already stretched.
So what can he do then. Well there always is Alice In Wonderland to draw inspiration from.
Why, sometimes I’ve believed as many as six impossible things before breakfast.
If you don’t know where you are going, any road will take you there.
One day Alice came to a fork in the road and saw a Cheshire cat in a tree. ‘Which road do I take?’ she asked. ‘Where do you want to go?’ was his response. ‘I don’t know,’ Alice answered. ‘Then,’ said the cat, ‘it doesn’t matter.
So emboldened by the writing skill of Lewis Carroll lets examine the details and it starts in an almost sane fashion.
We are creating a new European Fund for Strategic Investments, guaranteed with public money from the EU budget and the European Investment Bank (EIB). The Fund will be able to mobilise €315 billion over the next three years.
But how can this not affect the national budgets are we have been promised? Now we need to immerse ourselves in a through the looking-glass type of world.
The Commission has put up €8 billion from the EU budget. This backs up a €16 billion guarantee given to the Fund. Topped up by another €5 billion from the EIB. That makes €21 billion.With a €21 billion reserve, the EIB can give out loans of €63 billion. That’s €63 billion of fresh financing we’ve just injected into the economy. But the EIB will not be acting alone. The EIB will be financing the riskier parts of projects worth 315 billion, meaning private investors will be pitching in the remaining €252 billion.
You may note that there is a swirl of numbers and magically very little becomes a large sum. If only we had Alice to explain this! The EU Commission is only putting up £8 billion of actual cash at which point we have a leverage rate of 39. That is a little different to the implied leverage ratio of 3 is it not? If we include the capital provided by the European Investment Bank or EIB we reduce the leverage ratio to 25. If we also chuck in the guarantees as we mull the difference between a guarantee and capital the leverage ratio falls to what feels like a mere 15! What could go wrong?
Jean-Claude is keen to emphasise the latter ratio.
Every euro from these programmes paid into the Fund creates €15 euros for those very same research and infrastructure projects.
Also let us note the 252 billion Euros of private-capital which has been magicked into existence. We know that it is not there right now because President Juncker has told us so. To get it to turn up he will have to sweeten the terms as in if we shorten his name to Junk, that is the bit the taxpayers will be backing. Taxpayers should rightly fear that their losses could easily exceed the supposed capital in yet another “surprise”. Seeing as the expenditure will be off-balance sheet aka not counted there will be some fun and games to say the least in such a scenario. Imagine struggling Greece and Italy having to pay up their share of the losses. This bit may be correct though except not in the way intended.
4. No way back
Who will be doing the investing?
Never fear there is a team ready and waiting.
The Fund will have a dedicated Investment Committee made up of experts that will have to validate every project from a commercial and societal perspective and based on what value-added they can have to the EU as a whole.
Would somebody please explain to me a) How this works? and b) What have these experts been doing up to now? It reads like a bureaucratic nightmare out of 1984 or Brave New World. Also the bit below is surely a contradiction in terms….
mature, growth-generating projects of European significance.
After all if such things were readily in supply matters would be not where they are would they? Quite how all that fits with the section below escapes me.
We need something agile.
This institution receives almost unmitigated praise which would seriously trouble me if it did not do so already.
Werner, the triple-A of your institution is a European treasure that we will now put to even better use for Europe. We couldn’t have done this without you.
I am not sure what Jean-Claude Juncker thinks he has actually done yet! I guess like many politicians he equates talking with doing. Anyway dear readers the vast majority of you are backers of the EIB which increasingly does not just invest in Europe as you might think. Its scope has -somewhat bizarrely- spread all over the world. You might think that the current state of the Euro area economy would require its full attention but apparently not.
Here are some details for you to peruse.
At 1 July 2013, the Bank’s subscribed capital amounted to more than EUR 243bn.
Quite a lot is it not? The major backers are the UK,Germany,France and Italy who all back 16.1% of it. In Italy’s current state I wonder how that works exactly? But it gets worse as the capital has been increased in recent times so how did Greece (1.2%) and Cyprus (0.1%) contribute? I do hope they were not lent money so they could provide capital…….After all that would be a prima facie ponzi scheme would it not?
Some of you may be wondering where this shows up in the UK ONS Public Finances report? Well it does not as it only appears when it is unavoidable,excuse me, losses are declared. At what point I wonder would they ever declare a loss? Much easier to say it is about to turn a corner.
Remember the EFSF?
There are so may echoes here of the European Financial Stability Fund or EFSF. Remember the days when individuals like Christine Lagarde told us that the EFSF was a “shock and awe” measure? Shock at the stupidity of it yes,and look at what it did to poor Greece.
Why would you wish to repeat a disaster like that?
This has all the hallmarks of a pyramid style ponzi scheme. I thought that they were supposed to be illegal.
Also as super national organisations deploy the backing of European taxpayers including the UK for their schemes and fantasies who of our elected politicians is on the case? Has democracy died?
Finally will private-sector investors get something of a free lunch on the back of European taxpayers and if so who selects the investors involved?