Europe Needs Investment More Than Budget Rules
After vacillating for weeks over the failure of Spain and Portugal to comply with Europe’s budget rules, the European Commission decided recently to vacillate some more. It will review the countries’ excessive borrowing in July -- after Spain’s general election. That’s the trouble with fiscal rules that aren’t enforceable, and that you wouldn’t want to enforce even if you could.
Europe needs wholesale reform of its failed fiscal framework, but it lacks the necessary political will and popular support. Until this changes, trying harder to promote investment would be more effective than just hoping for the best.
Europe’s rules require budget deficits to be no more than 3 percent of national income. Spain’s is 5.1 percent. Portugal is in breach as well, with a deficit of 4.4 percent. In addition, countries are supposed to keep public debt at no more than 60 percent of income. Of the EU’s 28 members, only three have consistently complied with both rules. At the moment, nine countries are subject to the provisions of the so-called excessive deficit procedure, although the Commission has recommended that Cyprus, Ireland and Slovenia be let off for good behavior.
In theory, after several rounds of warnings and finger-wagging, this provides for fines of as much 0.2 percent of gross domestic product. In practice, Europe doesn’t dare. What sense would it make to punish an economy, like Spain’s, that’s already struggling -- not to mention the fact that it currently lacks a government? The EU is unpopular enough already.
Fully repairing the fiscal system requires a back-to-basics rethink, and the creation of a limited form of fiscal union for countries that are members of the euro zone. For the moment, with voters looking askance at any and all EU initiatives, that’s out of the question. But two less radical approaches would help in the meantime.
First, boost public investment. The need is clear: net public investment in many EU countries has been low for years and especially since the financial crisis; in Belgium, for example, it has been zero for decades. Additional infrastructure investment would create demand in the short term and boost growth in the long term.
The rules are elastic enough to permit this. And a suitable EU institution exists for the purpose: The European Fund for Strategic Investments aims to attract private capital for worthy projects that require public support -- such as building a new teaching hospital in Birmingham or improving the energy efficiency of 40,000 residences in France. Up to now, the EFSI has approved around 9.3 billion euros ($10.4 billion) of financing for infrastructure projects. It is a new body, but it needs to scale up -- a lot and fast.
Second, support wholly private investment by accelerating efforts to develop an integrated market for capital and especially equities. This may be the best way to help the EU cope with economic shocks and foster catch-up growth in its poor countries -- more effective, even, than a functioning fiscal union. It requires a more determined assault on regulatory impediments to intra-EU capital flows, harmonized insolvency laws, the long-promised banking union, and other steps. Much of this innovation can be done without the need for a new EU treaty.
The Commission solemnly refers to the existing budget rules as the “cornerstone of the EU’s economic governance.” That’s nonsense; those rules are broken. But until they can be fixed, move the focus elsewhere: from austerity and restraint to investment and growth. Who knows? The right kinds of public investment might even make the EU more popular.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com .