Can the euro zone’s economic and argumentative gridlock be broken?

The euro zone economy is no longer in meltdown, but nor is it providing job opportunities for half a generation of young people across the southern half of its territory. Its economic gridlock is matched by gridlock in the debate between economic commentators and public opinion in Germany and some other northern countries who feel that they are resisting future generations being crippled by public debt, and those in the other countries as well as commentators in the Anglo-Saxon world — though not part of the euro zone they have an interest in its performance– who argue that stagnant economies sustaining massive unemployment and entering a possibly prolonged period of deflation will not only fail a generation, but be stuck in a deflationary debt trap which further austerity will only make worse. The European Central Bank’s attempts at an expansionary monetary policy will remain insufficient. The arguments apply not just to the public finances of the southern countries but also to Germany itself, which outsiders see as having plenty of space for fiscal stimulus but the Germans feel has to unwind the debt accumulated after unification and avoid a repeat of the bad example it gave in the early 2000s to other countries by breaking the provisions of the fiscal pact which Germany itself had insisted on as a precondition of the creation of the euro.

There is no simple answer to resolve the differences between the two sides. But there could be a more constructive dialogue on ways to stimulate the economy which do not harm long term fiscal sustainability.  Some Keynesians argue that almost any for of fiscal stimulus will pay for itself by the tax revenues or saved benefit payouts which stronger economic growth would provide, but to fiscal conservatives this sounds complacent and reckless.  However, some measures could stimulate economic recovery while not risking undermining long-term public finances.

The most indisputably beneficial measure but one which has by no means been fully applied would be for governments to borrow on the markets to pay all their bills to private businesses as soon as they are incurred. Nominally this  would increase public deficits but would not add to effective debt, and would put substantial financial resources into the hands of the businesses concerned and thereby into economies.

A second measure which should also carry the argument convincingly is to bring fully up to date all maintenance and repairs of essential infrastructure. This would clearly reduce the need for future expenditure. There is such a backlog in Germany and other countries. The impact on long term public finances could be further improved, for example by for example deciding that in Germany, where passenger vehicles now use autobahns for free, they would have to pay tolls as already freight vehicles do, and passenger vehicles in France and Italy.

A third somewhat more contentious but nevertheless strongly arguable class of measure would be to put in place public investments which will directly generate future income. There are admittedly few such projects which could be confidently predicted to bring about enough return to fully repay capital and interest. However, given that there are clearly offsetting receipts to public finances from the income tax paid by individuals and companies working on the projects as well as by further multiplier effects, a public investment project could be shown to be likely to have net beneficial effects on long term public finances if it can be predicted with reasonable confidence to generate substantial income streams, even if these are not sufficient to make the project profitable from a narrow accounting viewpoint. An example would be rail or urban transport projects where projected fares would pay for running costs but where the cost of capital would be partly subsidised.

There is furthermore the huge and urgent field of energy, or energy-saving, investments necessary for long term climate sustainability but also for nearer term economic and political sustainability in weaning Europe off dependence on Russian and Middle Eastern oil and gas and ensuring that there will be sufficient generating capacity. Much of that may be provided through private investment if there market conditions are provided but there could also be a significant role for up-front public sector investment, for example in an integrated electricity grid throughout the EU.

Jean-Claude Juncker has said that a €300bn investment programme to stimulate the economy will be a priority once his new college of commissioners takes over on November 1st. As with government promises of such funding, there will be justified scepticism as to whether any such programme really represents new money rather than a repackaging of existing funds. Certainly, there can be no increase in allocation from the EU budget which is fixed until 2020. More could be done to leverage EU funds with private sector finance but that also is already part of the policy Mr Juncker inherits. The most obvious and uncontroversial alternative source is the European Investment Bank which has a good record and is able to borrow at very low interest rates. But in order to maintain its triple A credit rating it would have to continue to fund relatively unrisky projects. Its scope can be expanded but not probably to the extent of the planned €300bn. Something else is likely to be needed to meet the target. The objective should be to persuade Germany whose support is essential to other plans which would be more risky and controversial but which could nevertheless be justified by using the above arguments as beneficial or at least neutral regarding the euro zone’s long term fiscal sustainability. Trying to win these limited arguments would be difficult but would be more likely to achieve success that trying to argue that public debt and deficits can simply be ignored.

Tomorrow October 7th could be key date for UK’s future in the EU

Tomorrow, October 7th, will be an important day for Britain’s future prospects of remaining in the EU, if the Conservatives again lead a government the next election. Jonathan Hill, the former leader of the House of Lords, who has been put forward by Jean-Claude Juncker as commissioner for financial services in the next Commission, is being recalled to Parliament to face further questions, the only commissioner to have been recalled so far  although there are question marks over a few others). The reasons for his recall include the fact that he will have to learn quickly since he is not an expert in financial services, although he answered all the questions competently. Apparently controversially he said he had no view on eurobonds or taxation, but these are both matters with which he will be primarily responsible and which are highly political so any non-anodyne remark would have been likely to have been criticized. While some of Mr Juncker’s selection of commissioners are highly expert such as the transport and health commissioners, Maros Sefcovic (Slovakia) and Vytenis Andriukaitis (Lithuania), there are others without significant experience such as the environment commissioner, Karmenu Vella (Malta)  or who have little experience and the energy commissioner, Miguel Arias Canate, has had experience mainly with the oil sector on which he will be supposed to reduce dependence.

There is actually a good case, given the failure of practitioners with high levels of expertise to have spotted the weaknesses in banks and other financial companies, for someone coming from the outside with a fresh, common sense approach.

Mr Hill, coming from a country outside the euro zone would not be best suited to have a major role in running the euro zone banking union. But supervision of banks will be the responsibility of the European Central Bank and with regard to legislation, Parliament has already agreed to a flawed compromise on winding up unviable banks. Any future legislation will be determined primarily by what is acceptable to member governments rather than anything the Commission does.

The fact that the UK is able to act as the financial services centre of the whole EU,including the euro zone despite not being party of the euro zone, is potentially controversial. Nevertheless, it is accepted that a fundamental principle of the EU is free competition throughout member states. Given that Mr Juncker has put forward Mr Hill as an olive branch to the British following David Cameron’s unjustified attacks on Mr Juncker’s own appointment, his rejection would be seen widely as a slap in the face for both Mr Juncker and the British government which would create very unfavourable conditions for the referendum on EU membership which any Conservative led government intends to hold in 2017. The recall of Mr Hill probably reflects political maneuvering within the European Parliament. From one point of view it might be argued that the UK government can hardly complain since its own EU policy is largely formulated as a result of political maneuvering to try to hold together the Conservative Party and head of the threat to the Conservatives from the UK Independence Party. However, Parliament will have to consider the huge potential consequences that a rejection of Mr Hill could have for the UK’s continuing membership of the EU.