Saturday May 23, 2015 Search
Weather | Athens
14o C
09o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Europe needs new investment, not new rules

In the telecoms area, building a better European network makes sense, yet the public hand should not crowd out private spending.

By Guntram B. Wolff *

As the European Council meets in Brussels this week, the big debate on what a new policy deal for Europe could look like has re-emerged. Opponents group themselves around the famous “stability” vs “growth” camps, with the former arguing for the merits of fiscal discipline while the latter argues fiscal flexibility to finance reforms is more prudent. The “growth” camp points to the harsh reality that once the fiscal compact kicks in, it requires substantial savings by the government, while the “stability” camp emphasizes that this is exactly what is needed to render high debt levels and unfavorable debt dynamics more sustainable.

In my view, the EU must avoid another useless fight over its fiscal rules and instead use political capital to foster growth. A deal could be designed along three central elements.

The first element starts with the recognition that debt levels in several countries are already very high. The fiscal space to engage in a new stimulus as a growth instrument is simply not there and one must avoid risking a new financial crisis.

In particular, in countries where the size of the state is already very large and the efficiency of the government sector is questionable, a new fiscal stimulus should be avoided. The most convincing national growth proposition in such circumstances is a serious reform of the state and an adjustment of fiscal expenditure away from rents to much more needed growth enhancing public goods. The current fiscal rules already allow a slow-down in fiscal consolidation in exchange for serious structural reforms.

The second element of a deal would be recognizing that it is very difficult to maintain debt sustainable and primary surpluses high when euro area inflation rates are very low and real economic growth is as anemic as it is currently. Arguably, the euro area needs a different macroeconomic policy stance.

Yet, countries with high debt levels cannot provide a stimulus. The logical consequence is that countries that do have fiscal space, such as Germany, the Netherlands, Denmark, Sweden, Poland and Finland should start a public investment spending stimulus financed with deficits. Investment areas include the improvement of infrastructures such as roads and railways as well as increased spending in education and R&D.

This would be good for several of the countries and especially for Germany, which in any case is investing far too little, but it would also have positive spill-over effects on the euro area. This boost needs to be combined with an aggressive monetary policy stance.

The third element is recognizing that Europe underinvests in European public goods. An investment boost in trans-European infrastructure would not only be beneficial for Europe’s single market, it would also constitute an important stimulus to economic growth.

Which projects would be worthwhile undertaking and how could they be financed? The European energy network comes first to mind. In fact, with Ukraine’s gas supply crisis, the question of an adequate EU response to a potential gas shortage has become urgent. Building a better European energy network that could address energy shortfalls due to such external shocks is critical.

Yet, much of the energy network as it stands currently is in private hands. A public intervention should prevent to crowd-out private investments or render private investments non-profitable and it therefore must focus on those parts of the network, which the private sector does not deliver.

A further important area to invest public resources in is energy savings. Subsidizing and supporting investment in this area would not only make sense to meet Europe’s climate goals, it also can represent meaningful amounts of resources to have a macroeconomic impact on demand.

Similarly, in the telecoms area, building a better European network makes sense, yet the public hand should not crowd out private spending. Therefore, support for broadband build-up and other networks must be focused on areas, where the private sector would not typically invest, such as rural areas. In addition, more resources for a European mobility scheme for young workers would be useful.

Funding for this investment boost should come from European funding mechanisms. The European Investment Bank as well as project bonds could be used much more aggressively to allow for additional European investments of at least 70 billion euros in 2015.

Instead of wasting political capital on yet another reform of the Stability and Growth Pact, it is time for Europe to design a new deal on investment. Europe sorely needs this growth to meet its fiscal targets.

* The writer is director of Bruegel, a European economics think-tank.

ekathimerini.com , Wednesday June 25, 2014 (10:54)  
Consensus is key
The other inequality: how the state spends our money
Reform not stimulus is way out for Greece
A catalyst for change
Deal no closer following PM’s meetings in Riga
Athens believes that Greece could still clinch an agreement with its lenders but probably at the start of June, rather than by the end of this month as it had previously hoped, following the...
Greece to back NATO-led campaign against ISIS, Kammenos says
Greece will join the United States and other NATO members in efforts to defeat militants of Islamic State (ISIS), an issue which is expected to be discussed in the summit of the transatlanti...
Inside News
Car sales drop a gear on VAT rate uncertainty
Different scenarios of changes to value-added tax rates have paralyzed the car market in the last couple of weeks. Expectations for a rate cut from 23 to 18 percent, and the government’s int...
Bulk of loan requests comes from food service
The Greek growth model for small and medium-sized enterprises during the period of the crisis will have to change, senior banking officials stress. The majority of demands for corporate fina...
Inside Business
SOCCER
Greece escapes soccer suspension, FIFA happy with changes
FIFA says it is satisfied with changes made to sporting law in Greece, and has dropped a threat to suspend the country from international competition. In a letter to the government dated May...
SOCCER
Four-goal Panathinaikos thrashes Asteras away
Panathinaikos thrashed Asteras at Tripoli to gain an early advantage in the race for a spot in next season’s Champions League qualifiers, as the Super League play-offs got under way on Wedne...
Inside Sports
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Deal no closer following PM’s meetings in Riga
2. Greece to back NATO-led campaign against ISIS, Kammenos says
3. SYRIZA, ND waver over agreement
4. Nearly 800 irregular migrants detained as EU mulls refugee relocation plan
5. Car sales drop a gear on VAT rate uncertainty
6. Bulk of loan requests comes from food service
more news
Today
This Week
1. Merkel stamps out brief optimism on Greece after Tsipras talks
2. Lessons from Israel’s tech miracle
3. Tsipras to meet Juncker on second day of Riga summit
4. Civil aviation staff to hold walkout on holiday weekend
5. Banks will be asked to revise their restructuring plans
6. EOPYY struggles for funding, sees overdue debt rise
Today
This Week
1. The Greek-German breakthrough that didn’t come
2. Conspiracy madness
3. Greece came close to not paying IMF
4. National self-awareness put to the test
5. Albanian demarche raises concerns about possible territorial claims over Greece
6. Greek endgame nears for Tsipras as bank collateral hits buffers
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2015, H KAΘHMEPINH All Rights Reserved.