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Brussels officials tend to base impressive figures on theoretical arguments. However, investors trying to gauge the strength of the policy response should look a little closer.
The latest initiative of the EU Commission aimed to stimulate investment of € 315 billion with € 5 billion in public funds from the European Investment Bank and a guarantee of € 16 billion from the EU budget. The Commission boasted that it had exceeded that initial target by almost 50%. However, the auditors were not so sure.
Commission President Ursula von der Leyen is now trying to show the same trick with recovery funds, which is frustrating for those who need to see real money.
In a video conference with EU leaders last week, French President Emmanuel Macron opposed “artificial” proposals in the EU budget, two informed officials said.
The problem for Ms Von der Leyen and her team is that, despite all the talk of European money, the EU budget is a paltry 1%. Gross national income In addition, much of it is spent supporting agriculture and subsidizing the bloc’s poorest members. The actual fiscal power in Europe remains under the control of a handful of national governments, especially the Germans. So when the commission wants to have a financial impact, it has to spin as ingeniously as possible.
This time, however, when the economy is forecast to recession up to 15%, and in some Member States public finances have been stretched to the maximum, filling the gaps in cotton may prove insufficient.
“The Commission should not fall back into the trap of financial cunning to avoid having to ask Member States to request much-needed additional funds,” said Luc Guttenberg, deputy director of the Jacques Delors Center in Berlin. “If Member States are unwilling to pay much higher premiums or allow the EU to borrow in large money markets, global financial alchemy will not be enough to guarantee a full recovery.”
Von der Leyen says the commission will take the same approach when it comes to calculating a recovery plan. “It is family territory,” he told reporters this month.
In fact, the draft commission plan drawn up in early April is not without alchemy. It promises to “generate” € 2 trillion in investments and to borrow € 320 billion from financial markets. Furthermore, it states that national contributions to the EU budget over the next seven years “will remain modest” and even below pre-pandemic levels.
The European Union and the euro.
This arithmetic is familiar to those who followed von der Leyen’s plans to generate billions of euros to finance Europe’s energy transition or the investment plan of his predecessor, Jean-Claude Juncker. The so-called Juncker Plan, launched in 2014, remains the starting point.
J.C. The idea of Juncker was that by proposing a small financing or guarantee package, the Commission could attract private investors and support riskier projects that would otherwise go without financing. Until 2019 At the end of 2006, the Commission announced that € 458 billion in investments had been distributed to 1.1 million small and medium-sized enterprises.
Auditors’ doubts
However, the European Court of Auditors is taking a more critical approach. His report last year concluded that many projects would have been funded in any event and without the Commission’s intervention, and that in some cases the Commission’s estimates of the amount of additional investment it had generated were overestimated.
There are more reasons for skepticism this time.
The Juncker Plan was created immediately after the sovereign debt crisis to boost private investment. Now that the virus has disrupted global demand, however, attracting investors may be more difficult, and some officials generally question whether appetite will be enough to implement the commission’s predictions.
The EU leader took a similar approach, estimating that around € 3.4 trillion would be used in financing to deal with the crisis. This figure includes national fiscal measures already adopted and lines of credit established to finance them, as well as liquidity guarantees, which may or may not be necessary, reallocations of the EU budget and initiatives planned but not yet implemented.
“I am afraid that the Commission’s intention to artificially inflate the supposed impact of its programs through guarantees and private financial injections will have a very limited effect in this situation,” said Mark Ferber, a European Parliament legislator and conservative German spokesman. “Sooner or later, we will have to accept the bitter truth, which is that we have no choice but to put new money in the EU budget or, for example, in the European Investment Bank.”
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