Hollande and Merkel: Where Left is Right – guest post by Stuart Holland

22/09/2013 by

Rather than the claim of German finance minister Wolfgang Schäuble that the rest of Europe needs austerity to be able to compete (The Guardian, July 19th), François Hollande was right to say in an interview with Le Monde (September 3rd) that Europe should stop apologising for the Eurozone crisis and its failure to recover growth and jobs, and act. 

Although this has disconcerted a range of federalists in France, he also is right in claiming that Europe does not need to wait for a ‘United States of Europe’. It can act without Treaty revisions and within a variable geometry framework rather than needing federalism.

Before he became President Hollande claimed that he supported the case that Eurobonds could both stabilise national debt and promote European recovery.[1]  For example, Eurobonds or € bonds for recovery have been dismissed by Angela Merkel on the presumption that these would need national guarantees and also fiscal transfers by Germany.  But which is wrong.  Since 1958, European Investment Bank bonds have successfully financed investments without needing either such guarantees or fiscal transfers.

In the decade following the 1997 cohesion remit given to the EIB by the European Council to invest in health, education, urban regeneration and protection of the environment it quadrupled its investment financing to over € 80 billions a year.

With austerity reactions to the Eurozone crisis, national and other co-finance for the EIB shrank, which meant that its investments fell by near half to €45 billions last year.  But it can gain co-finance from bonds issued by its sister institution the European Investment Fund which Jacques Delors set up after the 1994 Essen European Council, and which were part of its design remit.

In a hearing of the EU’s social partners’ Economic and Social Committee, both the EIF and the EIB have confirmed that this does not need Treaty revisions. The committee, including German employers’ representatives and the head of the European employers’ federation Business Europe, Philippe de Beck, then endorsed the case that joint EIB-EIF bond finance could restart growth, as well as that EIF bonds could finance a European Venture Capital Fund to enhance competitiveness not least since while venture capital in a southern European economy such as Italy is only a sixth that of Germany, that of Germany is only a sixth that of the US.[2]

It also has been overlooked that this can be without such bond borrowing counting on national debt. No EU member state does so for EIB finance. Nor need governments assume that bond markets or rating agencies would not support this.

In April this year Bill Gross, head of the PIMCO, the biggest bond investor in the US, stressed that Europe needed to recover growth since there are vast global savings in pension funds and sovereign wealth funds that lack investment outlets.

The case that recovery could stabilise the Eurozone also has been recognised by Standard & Poor. When S&P downgraded nine member states debt in January 2012 it stressed that three key reasons were (1) simultaneous debt and spending reduction by governments and households, (2) the consequent weakening of economic growth, and (3) the inability to date of European policymakers to act to counter this. 

Europe therefore need not be terrorised by rating agencies or bond markets. What it needs are political initiatives of the kind for which François Hollande is calling. Nor need decision-making on these be unanimous. They either can be by qualified majority voting in Ecofin or the European Council, or by enhanced cooperation – cooperation renforcée – which can be by a minority of member states but which – not least if the lead on this is by a major nation such as France – could generate much wider support.

Cooperation renforcée recently has been initiated by Germany and Austria in the proposal for a Financial Transaction Tax. The aim was to avoid this being blocked by David Cameron. But, on the same precedent, bond finance for recovery of the European economy need not be blocked by Germany or Austria. If initiated by France, it would be likely to gain support from Italy and from the UK, where George Osborne declared in July last year that he would support Eurobonds since EU growth was vital for British exports

While, this July, the governor of the central bank of Austria, Ewald Nowotny, pointed out that, without prejudice to its statutory obligation to maintain price stability, the European Central Bank is bound to support the general economic policies of the Union which Article 3 of the current Treaty includes the goal of high employment and adequate economic growth.

Clearly European policy makers are waiting on the outcome of the German elections on September 22nd. In his recent statement, François Hollande recognised this. Yet he is right to claim that Europe already has the instruments and institutions to stabilise the Eurozone and regain growth. This preferably would be with Germany. But, if not, Europe could act without her.


[1] www.euractiv.fr/europe-alea-francois-hollande-d François Hollande promet de casser certains principes établis, en suivant un économiste britannique et ancien député travailliste, le bien nommé Stuart Holland…. Le candidat socialiste est favorable aux eurobonds…

[2] ces474-2012_ac_en  ces474-2012_ac_fr   ces474-2012_ac_de   ces474-2012_ac_da   ces474-2012_ac_es   ces474-2012_ac_hu   ces474-2012_ac_it   ces474-2012_ac_nl   ces474-2012_ac_pl   ces474-2012_ac_pt

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