A European New Deal financed by the EIB, with ECB QE-backing, is the optimal policy: Now recommended also by W. Münchau

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.


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  • “All that is now needed is the political will to choke off the crisis. The instruments are in place.”

    Plus you have a person of german accent advocating them…

    • “Plus you have a person of german accent advocating them…”

      There are also people of “german accent ” collecting trash. I would not bet too much Money on Münchau having any influence.

    • Outside of certain rather small leftish circles nobody gives a damn about what Munchau advocates or not.

  • “With interest rates close to zero, such a programme would be essentially self-financing”

    Münchau hast already forgotten that the artifically low interest rates Greece (and others) enjoyed between 2001 and 2010 thanks to the stupid common currency exploded right into their faces. Once the markets recognized the € sham. So he wants to give this lunacy a 2nd chance.

    Of course, everybody is entitled to make mistakes, but to make the same mistake twice is plain stupid. Here the mistake is the “With interest rates close to zero”. 1st this is equivalent to try to cure a drug addict with even more of his preferred drug. And 2nd the interest rates won’t stay close to zero forever. They will climb as it happened in 2010 so the interest payments will become unbearable.

    What then about ‘self-financing’? But hey, again, the taxpayers would have to backstop the stupidity of the ECB, the Commission, the national parliaments and all the ‘more debt’ supporters.


    • How many years will it take for you to understand that before the euro, yields on government paper were a function of Central Bank Interest Rates and additionally the gvt could not run out of money while after the entering the euro, interest rates were determined by the markets completely while government must rely upon them for funding?

      Greece was not ENJOYING anything after entering the euro, because previously it was setting its OWN rates for its OWN debt in its OWN currency.

    • Ah! Greece and the other FGIIBS did not enjoy a boom based on cheap Money from the North? OK, then let them have their old interest rates back!

    • Ηe is referring to rates on government yields not the cheap credit for the prv sector.
      How can any country “enjoy” having the rates on its debt set by the markets while previously it was setting its own rates in its own currency ? The central bank determines the rates based on its target rate.Whether it is 20% or 3% is irrelevant because the gvt cannot run out of money.
      The only reason greek yields were high was due to the high interest rates the CB was setting.
      You should have done some research to see for yourself that as the CB interest rates were falling (which was part of the procedure to enter the eurozone) so did the yields on gvt debt.

    • So you would argue Argentina can set the interest rates for ist debt? Maybe you are emixing up coupon rate and yield?

    • Argentina can set the rates for its debt whenever it is issued in its currency while the currency is allowed to float freely.It cannot set the rates if it borrows in dollars or euros, or in pessos when they are pegged with another currency.

      No I am not mixing coupons with yields.The yield curve on gvt bonds is in sync with the coupon rates new issues will have.A bond issued in 2000 maturing in 2016 may had 6% coupon rate.However if today’s yield of this bond is at 2% that means that if another bond with 2Y maturity is issued, it will have a coupon around the 2% area if issued at par value.

    • Would you buy an Argentinian bond in Arg. Pesos (Floating freely) that has a 0,1% coupon (set by the government) at face value?

    • Who cares? Let’s say I wouldn’t. What is your point? Greek yields were at 20% in early 90’s and went below 5% later on. I didn’t see an issue failing. After all issues are designed so that they can’t fail.
      Primary dealers are oblidged to bid for the whole issue every time.
      Have you seen any Japanese bond issues fail?
      The market tried to short them and the Japanese CB destroyed them…

      Bonds do not fund the gvts that have issuance ability anyway.
      They merely act as a monetary policy tool.
      Have you ever wondered how come Greece had to pay 20% interest on its debt in the 90s with 100+% debt/gdp with no default crap and with a similar debt/gdp in 2010 it asked for a bailout while interest was far below 20% ?

    • The Point is someone needs to buy the government bonds. So if the price is too high (yield to low) noone will buy it. Conclusion government cannot set the interest rate, the market does.

    • @SoundMoney:”The Point is someone needs to buy the government bonds. So if the price is too high (yield to low) noone will buy it. Conclusion government cannot set the interest rate, the market does.”

      No, no, no, no! For a currency* ISSUER, nobody needs to buy the government bonds and it doesn’t have to issue government bonds in its own currency. Such an entity can either opt for a ZIRP forever or pay IOR. It’s not difficult, or esoteric and it’s been explained a hundred times.

      *non-convertible to another currency at a fixed rate or to a commodity (e.g. gold) and freely-floating

      A currency issuer’s treasury and/or its CB are PRICE-setters on financial assets it/they issue denominated in that currency.

    • Government Bonds in countries outside the eurozone, are risk free since they don’t have principal risk.Nobody invests in government paper in search for High Yields Mr. Great Economist.(Ofcourse the eurozone is a different story).They are the safest interest bearing asset in every economy (again the eurozone is a different story).

      “Conclusion government cannot set the interest rate, the market does.”
      Where is your evidence to back this?

      Here’s mine:

      2Y Constant Maturity Rate vs Federal Funds Rate

      “Conclusion government cannot set the interest rate, the market does.”

      I love this graph:

      10Y Bond Rates for USA,Germany and Japan


      You have to change the way you are thinking because:

      a)Either the market does not set the rates thus it makes sense for “debt-ridden” and recession-ridden
      Japan to have lower rates than the Beast of Professional Economic Policy that is Germany


      b) The “wise” market does set the rates and it believes that (from 1990’s until today) Japan’s bonds are safer than Germany’s.

      Now where’s your evidence ?

    • So Argentina is in the Eurozone? Were Argentinian government bonds risk free? How risk free were bonds of Greece before it joined the Eurozone?

      Would you argue that there was no default risk and also no Inflation risk?

    • There is a difference between the market sets rates/prices and the market is right (at all times).

      Refer to Benjamin Graham regarding “at all times”:

      “In the short term, the market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will in the long run be reflected in price)

      And the issue with central Banks is that they manipulate the market so it is out of whack even more than it would be without them!

    • Argentina had pegged its currency and if I am not mistaken it also had debt in dollars.
      Yes there was no default risk for Greece before the Eurozone.
      And as a matter of fact try to find ONE country that defaulted on debts denominated in its free floating fiat currency.

      And no I am not talking about inflation risk.
      After all inflation risk exists equally in all bonds in an economy.
      But principal risk differs vastly from one bond to another.
      I again remind you that pre-euro Greece was paying double digit coupons and had similar debt/gdp with 2010 when it asked for a bail out.

      “There is a difference between the market sets rates/prices and the market is right (at all times).”

      WOW! Did you just confess that the self-regulating markets make mistakes?
      So the market has been wrong for 15 years now?
      But I thought the market is always right and thus we should leave everything to it.

      “And the issue with central Banks is that they manipulate the market so it is out of whack even more than it would be without them!”

      Are you reading what you are saying?You have been arguing until now that the markets determine the rates.You even said that they’re not always right.
      Now you say that the CBs manipulate them.
      If the CBs manipulate them they do not determine the rates, period.

      Now what you call manipulation is what I call “The CB can set whatever rate it likes”.CB has unlimited money so it can buy (and then sell) Unlimited amounts of bonds effectively being able to set their prices via this procedure.
      And Japan is a perfect example.
      Look up the “Widow Maker” trade.
      The markets tried to do what they successfully did with Greece IN the Eurozone.

      P.S. Still waiting for your evidence.

    • Of course the CB manipulates (is not equal to choase an arbitrary number). It can do so for a limited time. At some point the Tide turns and there will be a bust. This is exactly what I criticize. The CBs cause bubbles, because they cannot control where the newly printed money will end up. The organization who receive the newly printed money first benefit and the people who receive it last get screwed.

      So Greece did not default in 1826, 1843, 1860, 1894 and 1932?
      I would say Germany defaulted at least as many times. East Germany even lost their sovereinity and was annexed by West Germany!

      So thee examples do not qualify your free Floating fiat currency restriction? So what? What does the creditor get back if the fiat is devaluated to zero value? OK, the debtor does not default, so gets some paper that less worth than plain white paper…. great….

    • btw didn´t the “bailed out” agree to the fiscal compact? Didn´t they accept to reduce the Delta (actual debt/GDP- 0,6 debt/GDP) by 1/20 each year in return to get bailed out?

      So now they (and their creditors) want to keep all the German tax payer money and continue to receive more and fall short on their end of the deal!

      One can argue the deal makes no sense or is worng, but to sign a deal and then violate it is just plain criminal behavior and dishonest.

      There might be reasons for not reaching the targets, but then one has to give up, what one is not entailed to receive!

      In case you have not noticed, even in Germany the Money does not fall from the sky. A road toll for cars will be introduced, which will bring revenues of 600 Million per years. Yes millions, this is peanuts in comparison what is going out of Germany to EU countries each year. And less than 1/1000 of what has bennlent or guaranteed at Zero or below market interest rates to non creditworthy countries!

    • Are we going to argue with evidence or with stupid rants, wishful thinking and sciolism ?
      You think that bonds finance a government that issues its own free floating currency while in this case they’re simply a monetary policy tool.
      The issuance of bonds drains excess reserves.The alternative of not buying a bond that pays interest is to stay with excess reserves (money at the central bank) that earn nothing.
      There’s no way a bank would choose the latter over the former, unless you were the bank manager ofcourse.

      Yes Greece did default these times and Germany too.
      Is that against my point?No it’s not.In all cases, the country was either not issuing its owing free floating currency or the debts on which it defaulted were not denominated if the country’s free floating fiat currency.

      “What does the creditor get back if the fiat is devaluated to zero value? ”
      IF the currency is devaluated to zero value the creditor will indeed get nothing back.
      Now I beg you, provide evidence of this happening.
      You just assume that the extreme scenario will happen by definition.
      How logical is that ?
      How many times have you seen this happen after 1971 when countries abandoned the gold standard ?

      “btw didn´t the “bailed out” agree to the fiscal compact? Didn´t they accept to reduce the Delta (actual debt/GDP- 0,6 debt/GDP) by 1/20 each year in return to get bailed out?”

      Yes they agreed to the fiscal compact in return of having German and French banks bailed out.

      “So now they (and their creditors) want to keep all the German tax payer money and continue to receive more and fall short on their end of the deal!”
      I would be ok with Greece being obliged to return the money that were spent in the Greek economy but the greatest part of the loans went to pay bonds held by German and French banks.
      Saying that “they want to keep all the German tax payer money” is bullshit.Because most of it went to save the banks where the “German tax payer” deposits his money.In other words you’re paying to save your banks and demand that others take up the cost instead.

      “One can argue the deal makes no sense or is worng, but to sign a deal and then violate it is just plain criminal behavior and dishonest.”
      To that we agree.But again why do I have to pay for this ?You’re favorite phrase about the euro is “We were never asked”.
      What makes you think that WE were asked about the euro?
      What makes you think WE were asked about the bail out?
      What makes you think WE were asked about the fiscal compact?

      “There might be reasons for not reaching the targets, but then one has to give up, what one is not entailed to receive!”
      Demanding from Greece to reach targets and get money to repay YOUR banks in return, is like your boss demanding from you to reach targets and if you reach them he will buy a new car to his daughter.
      Again, Greece should be liable for the part of the loan that financed Greek needs.Not for the part of the loan that kept your banks afloat.

  • It would be great if lending money into the economy would solve the problems in the EU and USA. But it won’t. It just distorts reality until the effect wears off. The reason for the declining economic health is lack of productivity. Your average small to medium manufacturer in Europe has to give 50 percent plus of their sales revenue to the government. Taxes are the reason for non existent economic growth. If you want more money in the hands of small and medium size businesses, tell the governments to stop taking so much in the first place.

    • You start by saying the “lack of productivity” is the problem. Then you say it’s too much tax. Typical clueless right wing incoherent nonsense.

      If it weren’t for the lies and nonsense coming from the political right, I’d give them more support. Mind, there’s an equal amount of nonsense emanating from the political left in the UK where I live, so normally I find myself showering insults on both lots.

    • Ralph: So true!

      I am of the same opinion. We are equally victimized by ignorance on both sides. And the funny thing is that one side wants to use the shortcomings of the other side to promote itself as the pretender to the throne. Meanwhile they are both totally unfit for the task.

      At a time of mass dissatisfaction with the existing political system there this illusory perception by the existing players that they have the right answer. No, they don’t.

      We are talking about available choices based on degree of ignorance. The lack of modern political talent is appalling, disturbing and down right dangerous for world peace.

  • Right. We will solve problems caused by fiat money and debt with more fiat money and debt….

    • Again. The same tired malarkey, over and over and over again, ad nauseam. Prove that our current problems were caused by “fiat money” and (WHICH?) debt. Definitively, without a shadow of a doubt, the current problems in the EZ were NOT caused by “fiat money” (the euro is not a proper fiat currency, as it is not issued by a proper sovereign) and (public) debt (which is the debt that I am 99.99% certain you meant in your comment). You can repeat your spiel a million more times and it will not become any the less false (and boring). Enough, spare us.

  • Great! Another plan to funnel tremendous amounts of capital flow through the hands and into the pockets of those who have gotten fabulously wealthy by destroying the savings, jobs and futures of the average European. What could possibly go wrong with letting the few cronies in the banking system today get their hands on more of the future capital of all Europe?

  • Dear Yanni,

    Munchau’s (and your) proposal is based on the assumption that the surplus nations of Europe (or rather, their governments and elites) have an interest in aggregate, uniform eurozone growth.

    Where did he (and you) get this quaint idea? That is, where is his (and your) assumption based, that, even though things (a.k.a. orchestrated deflation) work well for them (and they do, very much so), the surplus nations’ elites will support a change to current orthodoxy? More so, for the puny reason of giving the EZ-as-a-whole a chance?[1]

    NB. This is a genuine question of mine, not intended as rhetorical or ironic.

    [1] Change will have to come, and soon, to avoid a collapse, but if, as I fear, nobody “in power” cares for EZ-as-a-whole, it will be a la carte, targeting, e.g., France and Italy, probably in exchange for “reforms”. For those not on the “carte”, orchestrated deflation can (and, I fear, will) continue…

    • Newly printed money that is translated immediately into aggregate demand (via direct investment) would make a huge difference.

      But the EZ is governed by a gestalt of “virtuous vs. promiscuous nations”, identified with “surplus vs. deficit economies” and elaborated into fallacies like “sound money” (:-) and “expansionary austerity”, while what truly happens is “orchestrated deflation”.

      And that is why all such proposals are deemed “unconstitutional”. Meanwhile, Schauble turns thousands of French citizens to Le Pen, every time he opens his mouth…

    • “Newly printed money that is translated immediately into aggregate demand (via direct investment) would make a huge difference.”

      I understand. So lets start a new country and buy the biggest money printing press available. It will become the weathiest nation on earth.

      If everyone suddenly has twice the amount of money chasing the same number of goods noone is better off. If the FGIIPS have the new money first and then it comes slowly to the North, the FGIIBS are better off. So you might have a case in self interest.

    • Were you taught that simplistic way of thinking at your high ranked university ?
      If it was true that “whatever additional amount of money chases the same fixed amount of goods” no matter what, then even loans by the private sector would cause inflation since they increase the money supply.

      Economies below potential output will not face inflation as easy as you like to think for the simple reason that output is NOT fixed.More demand will cause greater output unless there is a reason for it to NOT grow.Go ahead and name the reasons this will happen in the eurozone.

    • “More demand will cause greater Output”

      Agreed. The difference I believe that this is only sustainable with productivity increases and you think it works like this: (1) Borrow money that people in another country put up guarantees for (2) Buy goods these exact same people produce. (3) Fail to pay back loans (4) Go back to step (1)

    • Maybe the subject has been broached before but be that as it may:

      I fail to see what SoundMoney’s continued presence as commentator on this blog offers. His contributions amount to a Muslim participating in a Christian blog discussion and repeating, incessantly and ad nauseam, that the main problem of Christianity is that it is not truly and properly Monotheistic. No matter what the topic of conversation is, no matter how many times his ‘idee fixe’ has been addressed, rebutted, retorted to with facts, figures and sound logic, it is repeated as if it is a simple truth that the rest of us refuse to accept because we’re somehow morally or intellectually deficient, and have devious ulterior motives which would be irreversibly frustrated were we to concede the truth of his proposition.

      So, perhaps upon your return from your vacation, you can address this matter, Yani. This isn’t a call for censorship, it’s a call for sanity, imo.

    • If prices charged are too high this capacity will not be utilized. Why would anyone buy Greek textiles if Bangladesh is cheaper? If labor laws in Greece are such that the producers (of whatever) cannot fire people or lower wages they Keep on hcargng to high prices and having excess capacity or lowering prices and making losses. —> Structural reforms needed!

  • Isn´t it lovely! Out of the 6 FGIIPS, there is only F&G left in the Soccer wolr cup!. It was a joy to see psain and Portugal leave! It will be even more joyful to see any Country leave the EU / Eurozone!

    • It’s difficult to comprehend your comment.

      There are 8 teams remaining, equally divided between the New World and the old world.

      The New World teams are: Brazil, Colombia, Argentina and Costa Rica.

      the old world teams are: France, Belgium, holland & germany.

    • Please note that the European countries that are left are both fom the DM block 🙂

  • I agree with Vasilis. To succeed, this scheme would have to be disproportionately turned towards the most damaged EZ countries (Greece, portugal, Spain, italy, Irleand, France and others, by decreasing order of magnitude).
    With 8% of the EZ GDP, it is a sum of something about more than 1000 billions euros that would have to be spent, of which probably more than half for piigs+france and others. Politically difficult to accept from a German point of view.

    Even if this scheme becomes a reality, il wil have to be repeated every ten years to compensate from the different inflation levels that makes EZ members competitivities diverging through time.

  • For any modest proposal (such as Yani’s) to have any chance of survival, acceptance and most importantly intelligent implementation, we must deal with extremists such as Schauble and Merkel first.

    Only after the obstructionists are decisively dealt with, such doable but presently not implementable proposals have any chance of actually doing any good. I am afraid that talking about things that can’t be politically done only adds to frustration.

  • I just read the below article in the Ekathimerini (interview with the President of the EIB). It confirms a point which I have made often in this blog: anyone arguing that the EIB should do more lending in Greece should first find out why the EIB is not lending more than it is and why their funding often doesn’t end up where it is supposed to end up, and take note of the fact that the EIB can only lend when there are investment projects which require financing.


    • Klaus:

      You really need to do your research before you speak and in the process display disturbing ignorance based on the type of persona you want to display(that somehow you are in the know and that of pseudo-gravitas).

      There are many qualified projects for Greece which are simply stuck on Brussels bureaucracy and inaction. From the port of Piraeus extension by Cosco to this CIP project below called EurAsia interconnector. Enough with you never ending belly aching that Europe is willing to lend but can’t find qualified projects as well as your previous banking nonsense bias. The EIB are a bunch of idiots and incompetent bureaucrats of the highest order and you are nothing but a false propagandist spreading lies and consistent falsehoods. Either get your facts straight or zip it.

      The project(EurAsia Interconnector) involves 600 kV DC submarine cable to link electricity systems of Israel – Cyprus – Greece. The project will have a capacity of 2000 MW and a total length of about 820 nautical miles, which is about 1518 km. In particular it includes three connections as follows:

      a. 329 km between Israel – Cyprus,
      b. 879 km between Cyprus and Crete and
      c. 310 Km between Crete and mainland Greece.

      It allows the transmission of electricity in both directions. The
      implementing Entity for the Cyprus – Crete connection is ΔΕΗ Quantum Energy Ltd and for Crete – Mainland Greece is ΔΕΗ Quantum Energy Ltd in collaboration with ADMHE. The estimated investment cost in the Greek area amounts to 800 million to 1 billion euro,
      depending on the underwater route, conditions of the seabed etc. From estimates based on studies for the interconnection project of Cyclades, in the implementation phase of the project 600 people are expected to be employed per year, while during the operational phase, this will create 15 to 20 permanent jobs. The anticipated completion date for the Cyprus – Crete section
      is 2019 and for Crete – Mainland Greece is 2018.

    • And Klaus:

      Since we are giving it to you straight, quoting ekathimerini is uber discrediting for your or any other argument.

      Do you have any idea what ekathimerini is?

      ekathimerini = TroikaNews.com

      In Greece, a country that is not big enough for more than 100 media/newspaper outlets miserable ekathimerini ranks 2932 (this is its ranking within Greece).

      Ekathimerini’s audience comes 19% from Greece, 16% from the USA, 15,5% from Canada, 9% from Switzerland, 3.4% from Albania, 2.6% from Cyprus, 2.3% from Romania and 2% from Turkey.

      From all of these countries above ekathimerini ranks its relative highest in Albania.

      What source do you think you are quoting via ekathimerini and for what purpose? This is a newspaper totally disconnected with Greece or Europe and it exists as the sole entertainment for some audience in the New World. Not even Australians find it worthy to read ekathimerini as a credible source for developments in Greece.


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