Faced with Angela Merkel’s categorical rejection of Eurobonds, the EU engaged a horde of financial specialists to find a creative way to circumvent it. They came up with the EFSI. Though the fund will not be operational until mid-2015, EU member countries have already proposed projects for the European commission’s consideration. By early December, all 28 EU governments had submitted applications – and they are still coming. An assessment of the application documents conducted by the Ifo Institute for Economic Research found that the nearly 2,000 potential projects would cost a total of €1.3tr, with about €500bn spent before the end of 2017. Some 53% of those costs correspond to public projects; 15% to public-private partnerships (PPPs); 21% to private projects; and just over 10% to projects that could not be classified. The public projects will presumably involve EFSI financing, with governments assuming the interest payments and amortization. The PPPs will entail mixed financing, with private entities taking on a share of the risk and the return. The private projects will include the provision of infrastructure, the cost of which is to be repaid through tolls or user fees collected by a private operator. Just like the many other “protective” measures taken during the crisis, this distortion of market processes will help to cement the sub-optimal allocation of European investment capital, hampering economic growth for years to come. Making matters worse, only a fraction of the new borrowing enabled by the mutualisation of liability will be factored into national budgets. This will render EU-wide debt-management agreements meaningless, including the stability and growth pact, which limits the overall deficit to 3% of GDP, and the 2012 “fiscal compact,” which stipulates that countries whose debt-to-GDP ratios exceed the 60% limit should reduce them by one-twentieth annually, until they are in compliance. (Hans-Werner Sinn)
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Saturday, January 10, 2015
Faced with Angela Merkel’s categorical rejection of Eurobonds, the EU engaged a horde of financial specialists to find a creative way to circumvent it. They came up with the EFSI. Though the fund will not be operational until mid-2015, EU member countries have already proposed projects for the European commission’s consideration. By early December, all 28 EU governments had submitted applications – and they are still coming. An assessment of the application documents conducted by the Ifo Institute for Economic Research found that the nearly 2,000 potential projects would cost a total of €1.3tr, with about €500bn spent before the end of 2017. Some 53% of those costs correspond to public projects; 15% to public-private partnerships (PPPs); 21% to private projects; and just over 10% to projects that could not be classified. The public projects will presumably involve EFSI financing, with governments assuming the interest payments and amortization. The PPPs will entail mixed financing, with private entities taking on a share of the risk and the return. The private projects will include the provision of infrastructure, the cost of which is to be repaid through tolls or user fees collected by a private operator. Just like the many other “protective” measures taken during the crisis, this distortion of market processes will help to cement the sub-optimal allocation of European investment capital, hampering economic growth for years to come. Making matters worse, only a fraction of the new borrowing enabled by the mutualisation of liability will be factored into national budgets. This will render EU-wide debt-management agreements meaningless, including the stability and growth pact, which limits the overall deficit to 3% of GDP, and the 2012 “fiscal compact,” which stipulates that countries whose debt-to-GDP ratios exceed the 60% limit should reduce them by one-twentieth annually, until they are in compliance. (Hans-Werner Sinn)
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