Creating a European fund exempt from EU fiscal rules is the main idea of a 200 page report commissioned by the Socialists and Democrats group in the European Parliament, just ahead of the 18-19 summit which is expected to make decisions concerning the investment plan, recently presented by Commission President Jean-Claude Juncker.
The“Independent annual growth survey 2015 was published today (11 December) and presented in the European Parliament by S&D MEP Maria João Rodrigues (Portugal) and several of its authors, including the coordinator of the effort, Xavier Timbeau, director of the analysis and forecast department at OFCE, the French Observatory for Economic Conjunctures.
The paper is obviously inspired by the €315 billion investment plan recently presented by Commission President Jean-Claude Juncker.
The public debt rule of not exceeding 3% of GDP has no strong theoretical or empirical support, the authors of the report write. They also say that regarding fiscal policy, the first-best solution is to abrogate the fiscal compact, as the 2012 Treaty on Stability, Coordination and Governance in the Economic and Monetary Union is widely known.
But more realistically, the authors argue that based on the Juncker investment plan, a more ambitious effort should be made to increase both public and private investment. Actually the report clearly says that the Juncker plan, which by the way S&D supported, is likely to fail, because its capital base won’t be sufficient to raise enough money to fund projects.
Rodrigues, who is Vice Chair of the S&D group, said that the report revealed a growing divergence between member states, and social inequalities in each of the member states was growing as well.
As a response to the challenge, she said the EU needed a new “New Deal”, referring to the US government’s program to bring the country out of the Great Depression in the 1930s. In Rodrigues’ words, the ‘New Deal” should integrate the following elements:
- A big push for growth driven by investment
- Sustaining demand by economic coordination capable of reducing inequalities. In particular, she said that the countries that have a larger room for manoeuvre are asked to raise salaries
- Discussing structural reforms. However, she added that the priority reforms are not those that aim to bring down the public deficit, but rather the reforms aiming at increasing growth potential and public revenue
- A fiscal policy capable of efficiently fighting tax evasion
- Finally, a more active role of the European Central Bank
She admitted that the proposals were not yet consensual, but this was her political family was putting on the table.
Rodrigues called the Juncker plan “a step in the right direction”, but added that its scope would be insufficient, as in her words the amount of investment needed is of €1 trillion, an amount more than three times higher than the one tabled by the new commission president.
Public investment is key to achieving a leverage effect, Rodrigues said, adding that the proposal of the European Socialists was to feed this plan with contributions from member states. If this is achieved, the fund would be able to borrow from the markets and lend money on large scale, triggering a massive investment drive, she said.
The fund, which she called a European Capacity for Investment, should benefit from the principle of “neutrality”, meaning that the national contributions will not be excluded from the national deficits and would be accounted as expenses, but they won’t trigger sanctions under the SGP.
“If we achieve this, we will enter a new phase on European integration, because we would recognise that in order to solve our national problems, we need to put in place European instruments, that we need to build a common investment capacity”, she said.
Rodrigues also said that the Europe 2020 strategy needed an overhaul, and be much more ambitious and based on sustainable development. In her words, this should include energy transition, social inclusion and digital transition.
Transforming national debt into EU debt
Xavier Timbeau provided further explanations, according to which the authors of the report propose, in order to re-launch investment, to transform national debt into European debt.
“The advantage is to neutralise the budget deficit rule”, he said.
Asked by EURACTIV what makes this proposal different from former proposals to establish eurobonds, which met with strong resistance primarily from Germany, Rodrigues said that this time the fund was not about reducing national debt, but for financing strategic investment.
Rodrigues added that this would be a powerful “multiplying mechanism” of the capacity of member states. Unlike the European Stability Mechanism, which is intergovernmental, the proposed fund would be a community mechanism, of which the Commission would be a board member and which would report to the European Parliament. The fund would be approved in co-decision with the European Parliament, she said.
Such a fund would be able to find financial support for projects which haven’t been able to find any, because they may not be profitable, but are strategic, she said.
Asked about the magnitude of the fund proposed, Timbeau said that in order to exit from the deflation trap, the eurozone economy needed 1 to 2 percentage points of GDP, while the amounts need for investment were of 2 to 4 percentage points of GDP. One percentage point of GDP in the eurozone is €100 billion, he said.