EC President Juncker is set to unveil a new investment program. It sounds good: a fiscal complement to the monetary policy stance of the ECB. Expectations are running high that the ECB will move to more aggressively expand its balance sheet, record low bond yields in many euro area countries, and negative 2-year yields in at least five countries and below 5 bp in another three countries.
However, the optics are more compelling than the details. The draft versions show that Juncker's proposal will require no real new public expenditures. The EC would provide some initial funds for proposed investment projects that it chooses. The initial funds will be used to draw in private investors. The preliminary proposal is for the EU to hold the tranche that covers the first loss, while the private sector would be the more senior creditors.
The 315 bln euro "Invest in Europe" program would be highly leveraged. It would be capitalized with only 21 bln euros. This includes 16 bln euros from the EU for which Juncker intends to use the 10 bln euros that Germany has already committed. The EIB would earmark 5 bln euros, even though European Investment Bank debt does not count toward any country's debt burden. Even the funds are in the form of guarantees.
The initiative, which disappoints several debtor nations, is expected to be approved the European Commission today and presented to the European Parliament tomorrow. Parliament will also take up a formal effort to censure Juncker for his role facilitating the tax loop holes as Prime Minister and Finance Minister of Luxembourg.
Not only are the sums small, but it is not clear that it will induce private investors. European officials have arguably been proven wrong repeatedly in thinking that the low investments has to do with high interest rates or lack of access to funds. Instead, the weak growth, high unemployment, and weak profit margins seem to be a better explanation for the weak investment trends.
Even if this is too pessimistic of an assessment, it is ultimately not very timely. Consider, even if there is no significant opposition, the program will not be up and running much before the middle of next year. Even assuming things work smoothly, the enabling legislation will take several months at the start of next year.
Some of the problems Europe faces is due to the lack of institutional capacity. This understandably takes time to address. However, some of the problems Europe faces seems to be simply the lack of sufficient will. The European Investment Bank can borrow more funds by issuing bonds. Those bonds, we have argued can be bought by the ECB as it expands its balance sheet. The EIB can fund infrastructure projects in Europe that can create jobs and lift aggregate demand, without jeopardizing the fiscal goals of any country.
Some wrongly criticize the ECB for being heavy on talk and light on action. This is unfair. Under Draghi, the ECB launched two LTROS, has full allotment of refi operation at fixed rates. In an unprecedented fashion, it has put the deposit rate at negative 20 bp. It has begun buying covered bonds (at a pace near 500 mln euros a day) and has just launched an asset-backed securities program. This is not to mention the OMT program which was never triggered by a sovereign, but helped bolster confidence that EMU was not disintegrating.
Many observers mistakenly think that QE is what the Fed did, and as the ECB is not doing that, it is not doing QE. The Federal Reserve never called its program QE, but rather credit easing. Given that Europe is more bank centric compared to the US, which is more market-centric (for the distribution of capital) and in incredibly low sovereign yields already it is not clear the effectiveness of a sovereign bond buying program now in EMU.
However, the optics are more compelling than the details. The draft versions show that Juncker's proposal will require no real new public expenditures. The EC would provide some initial funds for proposed investment projects that it chooses. The initial funds will be used to draw in private investors. The preliminary proposal is for the EU to hold the tranche that covers the first loss, while the private sector would be the more senior creditors.
The 315 bln euro "Invest in Europe" program would be highly leveraged. It would be capitalized with only 21 bln euros. This includes 16 bln euros from the EU for which Juncker intends to use the 10 bln euros that Germany has already committed. The EIB would earmark 5 bln euros, even though European Investment Bank debt does not count toward any country's debt burden. Even the funds are in the form of guarantees.
The initiative, which disappoints several debtor nations, is expected to be approved the European Commission today and presented to the European Parliament tomorrow. Parliament will also take up a formal effort to censure Juncker for his role facilitating the tax loop holes as Prime Minister and Finance Minister of Luxembourg.
Not only are the sums small, but it is not clear that it will induce private investors. European officials have arguably been proven wrong repeatedly in thinking that the low investments has to do with high interest rates or lack of access to funds. Instead, the weak growth, high unemployment, and weak profit margins seem to be a better explanation for the weak investment trends.
Even if this is too pessimistic of an assessment, it is ultimately not very timely. Consider, even if there is no significant opposition, the program will not be up and running much before the middle of next year. Even assuming things work smoothly, the enabling legislation will take several months at the start of next year.
Some of the problems Europe faces is due to the lack of institutional capacity. This understandably takes time to address. However, some of the problems Europe faces seems to be simply the lack of sufficient will. The European Investment Bank can borrow more funds by issuing bonds. Those bonds, we have argued can be bought by the ECB as it expands its balance sheet. The EIB can fund infrastructure projects in Europe that can create jobs and lift aggregate demand, without jeopardizing the fiscal goals of any country.
Some wrongly criticize the ECB for being heavy on talk and light on action. This is unfair. Under Draghi, the ECB launched two LTROS, has full allotment of refi operation at fixed rates. In an unprecedented fashion, it has put the deposit rate at negative 20 bp. It has begun buying covered bonds (at a pace near 500 mln euros a day) and has just launched an asset-backed securities program. This is not to mention the OMT program which was never triggered by a sovereign, but helped bolster confidence that EMU was not disintegrating.
Many observers mistakenly think that QE is what the Fed did, and as the ECB is not doing that, it is not doing QE. The Federal Reserve never called its program QE, but rather credit easing. Given that Europe is more bank centric compared to the US, which is more market-centric (for the distribution of capital) and in incredibly low sovereign yields already it is not clear the effectiveness of a sovereign bond buying program now in EMU.
Will "Invest in Europe" be DOA ?
Reviewed by Marc Chandler
on
November 25, 2014
Rating:
Reviewed by Marc Chandler
on
November 25, 2014
Rating:
