The European Commission is studying proposals coming from eurozone countries which would allow an injection of liquidity in weak economies without breaching tighter fiscal targets.
Two main proposals have been circulating in EU southern capitals for a few weeks, with Rome at the helm of the initiatives. They have been discussed bilaterally by Italy’s Prime Minister Mario Monti and German Chancellor Angela Merkel, according to Monti’s aides.
The election of François Hollande, the anti-austerity champion, gave fresh impetus to these plans.
One idea involves the reimbursement of pending debts that European public administrations have contracted with the private sector. As a one-off exception, this payment should be granted without having an impact on the deficit of member states.
The recently approved Fiscal Compact allows indeed “one-off and temporary measures” in the pursuit for a balanced budget.
According to Commission figures, the unpaid public debt to the private sector amounts to some €180 billion. If this money was released without further delays, it would represent a massive injection of liquidity in the EU economy.
This would be something much closer to a new 'Marshall Plan' than many other ideas on the table, such as the refinancing of the European Investment Bank by a mere €10 billion.
Obviously, the problem of finding money remains, as many EU public administrations have run out of liquitity. Issuing securities and sell them in the markets would be the most likely option to raise the necessary money, but with yields at today’s level, the risk is certainly high.
A looming new credit crunch
Even so, this move is increasingly advocated for by small and medium enterprises (SMEs), which find more and more difficult to access financing, as a new credit crunch looms in Europe.
The latest report on access to credit for SMEs, published by the European Central Bank (ECB) in April, shows that a higher percentage of small businesses perceives a deterioration in the availability of bank loans.
They were only 14% at the beginning of 2011, while now one in five entrepreneurs polled by the ECB declares to perceive a drop in the availability of financing.
The ECB underlines however that this percentage is still significantly lower than the 30% of sceptics recorded in 2009 after the bankruptcy of Lehman Brothers, which heralded a serious credit crunch in Europe.
Nevertheless, it is a worrying signal. The EU commissioner in charge of industry and SMEs, Antonio Tajani, this week sent a letter to member states urging them to adopt in advance the new directive on late payments which obliges public administrations to pay their debt by 30 days, or face the penalty of 8% in overdue interests.
The directive should be translated into national law by March 2013.
In a restricted briefing with journalists this week, Tajani said that he discussed with the EU Finance commissioner Olli Rehn the idea of not including in the public deficit’s calculation the one-off repayment of pending debts.
Tajani said that Rehn showed interest in this idea. Rehn’s spokesperson confirmed that it is a matter of debate, but did not add any further remarks.
Together with Internal Market commissioner Michel Barnier, Tajani also sent a letter to the European Banking Authority (EBA) to call for a downward reevaluation of the risk weighting for loans given by banks to SMEs, in order to facilitate the supply of credit. EBA seems however reluctant to make concessions on this point.
Could good investment not be expenditure?
Another idea circulating in Brussels these days involves a conspicuous use of public investment to spur growth, in line with the traditional Keynesian approach.
As it is the case for the proposal on SMEs’ credit repayment, the extraordinary public intervention through investment should be deficit-neutral, meaning that it would not impact on fiscal targets.
The Fiscal Compact, despite being a pro-austerity pact, contains in fact clauses which could permit not to include productive investment into the deficit’s calculation. It is what Mario Monti calls the ‘golden rule’. As it is for companies and individuals, states as well should not been forced to consider investment as current expenditure, argues the Italian Prime Minister.
The Commission does not miss an opportunity to call for “targeted investment” across Europe to be carried out by all actors, including the public sector, to restore economic growth in Europe.
But whether investment can be deducted from the annual expenditure of a state and the calculation of its deficit is a matter of negotiation. “The Germans do not seem to be willing to listen to that,” acknowledged a European diplomat.
This week two Italian MEPs, Roberto Gualtieri (S&D) and Mario Mauro (EPP) proposed an intermediate solution. They suggested deducting from the calculation of the deficit two-fifths of public investment. The ball remains in Germany’s court.