In June 2012, the authors published an article in the Economists Forum of the Financial Times suggesting a major investment programme for 2012 – 2015 to stimulate Europe. It was welcome that the EU leaders adopted some measures along those lines to encourage European growth.
It is now time for a first assessment. The result shows a half-hearted implementation of the half-hearted EU summit decisions in June 2012, and a lot of reluctance by some partners to implement. The main problems are suboptimal utilisation of the EU budget, with not enough shift to programmes to fight stagnation, as well as overall restriction of the EU budgetary space in 2012 and 2013. This is at a time when the need for investment is higher than ever before, as EU investment continues to fall and unemployment continues to rise.
After a mistaken cut of lending by the European Investment Bank in the first half of 2012, a turn-around is occurring now. The doubling of paid-in capital was reflected in encouraging results for increased EIB SME financing. However, infrastructure financing, like energy, is lagging behind due to the high lead times for new projects after the unfortunate cut in lending in 2012.
Economic growth can be stimulated with reforms, catalytic lending to encourage investment and lending where access to finance is blocked.
The main focus of the EU compact for growth as it was designed in June 2012 by EU leaders is on reforms and on unleashing market potential in a deeper common market. Experience shows that results of reforms usually take time; forecasts of impact tend to be over-optimistic and impacts are not neutral in respect to income distribution. A careful design and additional means to compensate for the ‘collateral damage’ would have been part of a good policy.
In the short run additional investment forms the more important channel for stimulating growth, both on the supply and the demand side. Such investment is driven at the European Union level by the budget and lending by the European Investment Bank (EIB). At the EU level and in many countries we observe a shift in intervention capacity from budgets to promotional banks – even more pronounced in times of tight budgets. The real measure for a well designed growth impact is the increase of investment capacity looking at all applicable channels of intervention together.
On the national level, less fiscal consolidation in countries with fiscal policy space would be very valuable, as would greater lending by national development banks in countries that have them. Furthermore, budgetary spending should shift to investment spending.
The starting point to measure an increase of intervention capacity was the level of 2011: (i) for the EIB (mainly with loans) the order of magnitude of 0.47 per cent of EU GDP p.a. (€53 bn) and (ii) of the EU budget (mainly with grants) its growth relevant parts of close to 0.50 per cent of EU GDP p.a. (€63 bn for competitiveness, innovation and regional investments).
European Investment Bank
In respect to the EIB we now observe a turn-around in the right direction. The year 2012 started with a move in the wrong direction for the EIB. In the first 5 months of the year only €8.5 bn of loans were signed (to be compared with an annual level of € 53 bn in 2011).This implied a sharp decline in lending of the EIB in Europe at a time when such lending was desperately needed as the EU economy was stagnating, and many countries had declining GDPs. In contrast, the largest development bank of Germany, Kreditanstalt für Wiederaufbau (KfW), increased its domestic activities in 2012 and did so in parallel with increased activities of the regional promotional banks as well.
It was only the discussion about a compact for European growth and jobs that changed the European picture mainly driven by the French presidential elections; this was reinforced by the negotiations in the German parliament where the opposition made a growth programme a precondition for passing the law of the fiscal compact.
The doubling of paid-in capital for the EIB was rapidly approved by all EU countries and the EIB started, in the second half of 2012, to increase its lending. But the EIB will not reach the full-scale of activities needed before the second half of 2013.
The only objective where the EIB achieved more in 2012 than in 2011 was lending to SMEs, where the lead time to prepare financial intervention is shorter than lending to infrastructure projects. SME activity was the ‘light’ in respect to the overall ‘dark’ outcome of the EIB activity in 2012 , with total lending falling to €44 bn (a reduction of 17 per cent), at a time when an increase was required urgently to help boost investment and economic activity.
The full contribution to growth comes with the right volume, the right sectors and the right financial products, also to facilitate investments in crisis countries. We are optimistic that after a lost year the EIB will quickly recover lost ground and make a valuable contribution to restoring growth in Europe with annual volumes of about €63 to 65 bn p.a. – some 0.51 percent of GDP.
We are less optimistic in respect to the budgetary situation. In this area we are also faced with one lost year and a second one is likely to follow. The general ‘lack of success’ for a budget stimulating growth is nicely phrased by the Commission in the presentation to the Council ‘one year after the decision… the consensus… must be translated into concrete results in respect to growth and jobs.’ The statement says (i) results are not yet there and (ii) they are in many respects not even under way.
Reprogramming of some 11% of EU programmes has been achieved, which is good. This allowed regions and member states to move from costly and perhaps oversized projects into a stronger emphasis on smaller projects and a clearer focus on SMEs. But the reprogramming has now been stopped basically because the budget does not allow for more payments – even if the programmes are respecting the overall budgetary ceilings of the current financial framework, because payments cannot be made without an amended budget.
Unfortunately there is not much improvement on the horizon for the next financial period. The budget is smaller than the current one (0.95 per cent of EU GDP) and the growth related parts like structural funds are reduced, so growth relevant parts of the budget decrease to some 0.47 percent of GDP. The increase in activity on the EIB side was hence followed by a equally big cut on the budget side – and budget normally means a higher intensity of intervention compared to financial instruments from the EIB, which translates into an overall shrinking intervention capacity.
In addition the call of the European Parliament to increase flexibility has not been heeded. The crisis requires flexibility in both dimensions: the sector of intervention (e.g. SME working capital or infrastructure) and the timeline (e.g. a crisis may require front loading). The flexibility granted for one year is good but does not meet future requirements. It is likely that we see again member states ‘trapped’ in programmes being designed for another economic environment than the execution of the programmes actually requires.
To add one last example: youth unemployment has grown significantly over the last year. So it is part of ‘not success’. And even worse the concepts for the future are rather blurry. This is a classical field for intervention, where mainly the budget has to work and to some extent the promotional bank (microfinance, inception of companies from unemployment, growth of companies to create jobs, …). Sometimes the EU Commission creates the impression that the EIB can shoulder the bulk of the action, which is not in line with the historical experience. The bulk has to come from the budget and – beyond the rhetorical statements – it will not come into action before autumn 2014 (with the new structural funds), meaning that another year will be lost.
The discussion about additional financial capacity for the EU has not led to tangible results so far. We hope EU leaders will take visionary steps in the next summits and beyond. A real programme for growth needs more resources used more flexibly, a higher share of good investments that will quickly enhance both supply and demand, as well as special emphasis on measures to reduce youth unemployment now, such as higher financing for SME creation and growth. It can’t be emphasised enough that so far there has been no increase of the intervention capacity for growth.