Faced with deflationary forces in its core, and a lasting depression in the periphery, the Eurozone requires a major investment drive. One of the Modest Proposal’s policy recommendations is that the European Investment Bank (along with the European Investment Fund) embarks upon a massive investment drive (up to 8% of Gross Eurozone Product) without any national co-funding. These investments could be funded through 100% issues of EIB-EIF bonds, with the European Central Bank purchasing, in secondary markets, sufficient quantities of these bonds to ensure that their yields stay well below 1.5%, thus making a European New Deal not only possible but also self-financing – and off the books of national budgets.
The logic of this scheme was outlined first in a post entitled How should the ECB enact quantitative easing? A proposal. It received considerable support at The Economist May 2014 Bellwether Conference, as well as in the Journal of Central Banking, where Tom Bowker wrote an article entitled QE for infrastructure investment could be ECB’s alternative to ‘pushing on a string’.
Most recently, Wolfgang Münchau, in his regular Financial Times column, astutely noted that Prime Minister Renzi and Chancellor Merkel are on a collision course, courtesy of the former’s determination not to fall prey of Italy’s slow burning depression. Renzi, according to Münchau, is committed to an investment boom that will see off the forces of recession. Merkel, on the other hand, is determined not to allow fiscal deficits to exceed the Fiscal Pact’s austere limits. Can a clash be avoided?
The answer is affirmative: For if the European New Deal is effected by the EIB, with ECB backing, and given that EIB bond issues are (quite appropriately) do not count as national government debt, there is no need for Mr Renzi and Mrs Merkel to clash.
Wolgang Münchau agrees with this. Here is what he had to say this morning:
“With interest rates close to zero, such a programme would be essentially self-financing. It could also help raise potential growth if the investments were to lead to an increase in productive capacity. It could be funded through five or 10-year bonds issued by the European Investment Bank. The European Central Bank could then buy most of these bonds as part of a future programme of asset purchases, which I expect to happen later this year.”
All that is now needed is the political will to choke off the crisis. The instruments are in place.