1. Beyond Austerity - without Treaty revisions, new institutions, fiscal transfers or national guarantees Stuart Holland Faculty of Economics University of Coimbra sholland@fe.uc.pt Conference on Beyond Austerity: Recovering Employment and Growth Foundation for European Progressive Studies (FEPS), Initiative for Policy Dialogue (IPD) and Fondazione Italianieuropei May 1st 2012 Rome

2. Outline of the Presentation Introduction 1.Both Stabilisation and Growth 2.The Delors Bonds 3.By Enhanced Cooperation 4.Without Treaty Revisions or New Institutions 5.With EIB and EIF Co-finance 6.Financing both Recovery and Cohesion

3. Introduction 1.The Commission proposal of Project Bonds is well intentioned but would not need member state guarantees 2. The European Investment Bank has issued project finance bonds for over 50 years without such guarantees 3. What is needed is public co-finance for EIB project financing 4.This can be through Eurobonds issued by the European Investment Fund attracting surpluses from the emerging economies and sovereign wealth funds 5.Such finance need not count on national debt and does not need debt buy-outs, not fiscal transfers, nor a new institution or a Treaty revision European Commission (2011). Feasibility of introducing Stability Bonds. Green Paper. COM(2011), November 20th

4. 1. Both Stabilisation and Growth 1. Stabilisation by Union Bonds The EU could cut the Gordian knot of the debt crisis if it converted a tranche of the sovereign debt of member states to Union Bonds which are not traded but held in its own ‘debit account’ 2.Recovery through Eurobonds A social investment led recovery programme funded, like the US New Deal, by ‘borrowing to invest’ through net issues of Eurobonds should be traded and would attract inflows from sovereign wealth central banks and central banks of the emerging economies.

5. A Gestalt Shift What is needed to ‘cut the Gordian knot’ on debt is a Gestalt shift and a recognition that while EU member states are deep in debt the EU itself has next to none. It had none at all until May 2010 when the European Central Bank began to buy up tranches of some member states’ national debt ► If the EU were to issue its own bonds to finance a New Deal style economic recovery it would be starting from less than a tenth of the borrowing base of the Roosevelt administration in the 1930s. ► This can be through the issue of Eurobonds by the European Investment Fund, which was designed to do so for the Delors Union Bonds

6. 2. The Delors Bonds Jacques Delors included the proposal for Union Bonds in his ‘full employment’ White Paper of December 1993. [1] He set up the European Investment Fund to issue the bonds. The key parallel was US Treasury bonds which do not count against the debt of American states such as California or Delaware. Therefore what now would be Eurobonds need not count on the debt of EU member states. [1] Stuart Holland (1993) The European Imperative: Economic and Social Cohesion in the 1990s, Spokesman Books

7. The New Deal Parallel But the New Deal parallel was not made in the Delors White Paper which meant a major legitimation of the case for the bonds was lost. The proposal therefore lacked resonance with a wider public. For too many people ‘Union Bonds’ just seemed another arcane European financial instrument. We should avoid this now. A recovery programme financed by Eurobonds should be recognised as financing a European New Deal, legitimated by parallels with that of the US in the 1930s.

8. Bonds and Fiscal Policy The US of course has a common fiscal policy. The EU does not. But Eurobonds could be project financed from the revenues of the member states gaining from them, as are EIB bonds. A common fiscal policy and a European Treasury are aspirations, which would need Treaty revisions. As the European Investment Fund recently confirmed to the Economic and Social Committee of the Union, it could issue the bonds without a Treaty revision.

9. 3. By Enhanced Cooperation According to the Treaty on European Union enhanced cooperation is by a minority of at least nine member states. Yet the introduction of the euro itself was a de facto case of majority enhanced cooperation. On this strong precedent, any member state could gain project finance through Eurobonds, but not all member states need agree to the issue of them. ► Germany, Austria, Finland and others could keep their own bonds.

10. Enhanced Cooperation 2 Enhanced cooperation needs agreement to the procedure by a qualified majority vote. Yet since all member states rather than only those in the Eurozone can gain finance from Eurobonds. A qualified majority in favour is feasible - not least since the UK is in favour of Eurobonds. Also, on the motion for an enhanced cooperation policy implementing the procedure only those member states supporting it vote. Some member states therefore may choose not to vote for adoption of Eurobonds but cannot block this if the procedure is approved by a QMV of all EU member states.

11. Criteria Recovery project criteria do not need to be defined by the Commission. or agreed by Ecofin. They already have been agreed by the European Council. On proposals by Antonio Guterres, to implement the 1997 Amsterdam Special Action Programme, the EIB has been remitted by the Council to invest in: ► health ► education ► urban regeneration ► environmental protection and green technologies ► support for small and medium firms and high-tech start-ups

12. Criteria 2 At Lisbon 2000 the EIB also was given a specific remit to promote economic and social cohesion and convergence. These are far wider ranging criteria than only infrastructure or industrial infrastructure. They concern central cohesion areas such as health and education whose investment finance can be European rather than national. In terms of social wellbeing they also are vital in terms of urban regeneration and protection and enhancement of the environment.

13. 4. Without Treaty Revisions or New Institutions Eurobonds can be introduced without Treaty revisions and without new institutions. The European Investment Fund, which was designed to issue the Delors EU Bonds, and now is part of the European Investment Bank Group, has confirmed to the Economic and Social Committee of the EU that: It does not need a Treaty revision to issue Eurobonds, rather than an increase of its subscribed capital from its present minimal level of €3bn. And this depends only on a management decision.

14. Macroeconomic Potential Since the 1997 European Council decision that it should be remitted to finance eco-social investments, the EIB has quadrupled its lending. This is why it now is nearly 3 times the size of the World Bank. Matched by co-investments from Eurobonds, and with investment multipliers of up to 3 1]1] This would mean a cumulative investment led stimulus to the European economy which could rise by or before 2020 to a net addition of 9 per cent to EU GDP ► and make a reality of the commitment of the EU to a European Economic Recovery Programme. 1] Observatoire Français des Conjoncture Economiques 2010.]

15. 5.EIB and EIF Co-Finance Bond issues by the European Investment Fund : 1.would not primarily be by pension funds but by the central banks of the BRIC emerging economies and sovereign wealth funds 2.Their concern is not with a AAA rating by agencies but to diversify their foreign exchange holdings out of the dollar 3.This also is a ‘store of value’ rather than rate of return concern for the BRICs 4.Bloombergs have sounded US financial markets and indicated that interest rates on Eurobonds could be lower than 2%.

16. A European Venture Capital Fund One of the main gains from the EIF issuing bonds is that their scope – unlike the Commission’s Own Resources – is near unlimited in terms of inflows to the Union from the central banks and sovereign wealth funds of the emerging economies. Another is that these could fulfil one of original design remits for the EIF – to finance a European Venture Capital Fund. This has implications, as in the design of the Delors bonds, for both growth and competitiveness. Germany has a Mittelstandspolitik and does not need financial instruments for small and medium firms. But a European Venture Capital Fund could offer this for the European periphery.

17. From Weakness to Strength With net issues of Eurobonds bonds, the euro would become a global reserve currency, taking the strain off the dollar Both the US and the trade surplus economies would gain if this is part of a European recovery programme - whereas contraction of the European economy as an outcome of debt stabilisation without a recovery programme would reduce both US exports and those of the emerging economies Risking thereby a meltdown of the global economy

18. 6. Financing both Recovery and Cohesion Such financing is not just ‘back to Keynes’. Keynes was primarily concerned to achieve higher levels of effective demand through monetary and fiscal policies. He aimed to raise private sector confidence by indirect intervention. By contrast, EIB-EIF joint project finance can directly realise investments in the social sectors for which the European Council already has agreed the criteria. With matrix, employment, income and fiscal multipliers gained directly rather than indirectly through interest rate and tax changes.

19. Meeting Latent Demand The proposals also are post Keynesian since concerned not only to achieve higher levels of effective demand But also to meet latent demand for such social investment projects which have gained planning and environmental approval yet not been realised because of the constraints of the Stability and Growth Pact on national co-finance When proposing Union Bonds in 1993 Delors sounded out how many projects at the time had gained planning approvals but had not been realised because of lack of national co-finance. The figure was 750 billion ecu. Today it would be between 1 and 2 trillion euros.

20. Not Just Recovery The potential is not to recover the past and to project it for the future but to finance an alternative future especially since: ► neither EIB bonds nor EIF Eurobonds need count on national debt ► social investments could be funded by such Union financial instruments ► as they were in the US New Deal ► thereby enabling higher levels of employment ► and promoting economic and social cohesion

21. Releasing National Fiscal Revenues Shifting social investments to Europe also would release a major share of national fiscal revenues to achieve the as yet unrealised commitment of the Essen European Council to ‘more labour intensive employment in the social sphere’ and therefore enabling ► more teachers and smaller class sizes, as aspired to by François Hollande ► more health workers for an ageing population

22. Global Implications Revenues for this would be supplemented also by higher fiscal receipts from recovery of employment in both the private and social sectors and thereby ► both realising latent demand and restoring the effective demand which is vital for both higher levels of employment and also sustained trade with the US and the emerging economies ►with investments in the social sphere through bond finance recycling global surpluses in a manner vital for a more balanced global economy End