Tuesday

23rd Jul 2019

Opinion

Juncker’s shadow Bank

  • "Governments to borrow without including the stock of public debt in the national public debt statistics?" (Photo: alles banane)

The European economy is still stalling despite a never-ending flow of inventive policy-making by the European Central Bank and other public authorities to replace private credit flows with public ones.

The latest invention is European Commission President Jean-Claude Juncker’s European Fund for Strategic Investment (EFSI), a tool for funding additional public and private investment in Europe to boost aggregate demand and improve European infrastructure.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 18 year's of archives. 30 days free trial.

... or join as a group

Resorting to a jaw-dropping leverage strategy, Mr Juncker wants to generate more than €300 billion in investment from an EU guarantee of €16 billion, and genuine funds of just €5 billion from the European Investment Bank (EIB).

The idea is to enable the EIB and the new EFSI to borrow additional funds from mostly private investors, largely securing them against investment risks.

In addition, national public investment banks, such as the German KfW, are invited to join private investors in co-funding the projects.

At this stage it is unclear what these projects could be.

Presumably, the EFSI will predominantly fund projects with a transnational utility such as cross-border roads and railway projects, or international broadband data and energy infrastructure.

In addition, credit to the order of €75 billion will be made available to small and medium-sized private firms.

Public shadow budget

My concern about this construct is that it involves a huge public shadow budget that allows governments to borrow without including the stock of public debt in the national public debt statistics, and without the annual borrowing itself appearing in the public deficit figures.

It is therefore an obvious tool for circumventing the Fiscal Compact of 2012, which requires each country’s debt-to-GDP ratio to shrink annually by 1/20th of the difference to 60 percent.

The Stability and Growth Pact, which limits the annual public deficit to 3 percent of GDP could also be circumvented and perhaps even the German constitution, which forbids the federal government from running a budget deficit from 2016 onwards.

The strategy of devising such shadow budgets to get around debt constraints has already been used with the European rescue funds.

While the debt taken by the first fund, the EFSF, was allocated to national budgets in proportion to national liability and hence increased the official public debt figures, its successor, the permanent rescue mechanism ESM, was given a legal underpinning that made it possible to keep the funds it borrows out of the national debt statistics.

The trick was to endow the fund with a bit of public money and substantial public guarantees that would enable it to borrow apparently on its own account. This trick obviously served as a blueprint for President Juncker’s fund.

While all this is legal, it is far from sound public finance.

It smells like the trickeries invented by tax havens such as Luxembourg, which make their business by depriving other countries of their tax revenues. And it recalls the practices of Europe’s private commercial banks when they ran special-purpose vehicles and other off-balance-sheet businesses in Ireland and elsewhere.

The banks’ houses of cards eventually collapsed, threatening to pull Europe into the abyss. Let's hope that the European Commission president’s new off-balance-sheet activities will have a better destiny.

Hans-Werner Sinn is Professor of Economics and Public Finance at the University of Munich and President of the Ifo Institute for Economic Research.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

Analysis

Europe's 'last chance' investment scheme depends on pension funds

During his successful campaign for the European Commission presidency, Jean-Claude Juncker described his flagship plans for a €300 billion investment programme as ‘Europe’s last chance’. But its success depends on getting pension funds to invest.

News in Brief

  1. UK foreign office minister quits ahead of Johnson as PM
  2. AKK to boost Bundeswehr budget to Nato target
  3. Police arrest 25 after Polish LGBT-march attack
  4. Ukrainian president's party tops parliament election
  5. EU interior ministers to meet in Paris on migration
  6. Schinas nominated as Greek commissioner
  7. Sea-Watch captain hopes for change in EU migrant rules
  8. Russia willing to join EU payment scheme on Iran deal

Six takeaways on digital disinformation at EU elections

For example, Germany's primetime TV news reported that 47 percent of political social media discussions were related to the extreme-right AfD party, when in fact this was the case only for Twitter - used by only four percent of Germans.

Stakeholders' Highlights

  1. UNESDAUNESDA reduces added sugars 11.9% between 2015-2017
  2. International Partnership for Human RightsEU-Uzbekistan Human Rights Dialogue: EU to raise key fundamental rights issues
  3. Nordic Council of MinistersNo evidence that social media are harmful to young people
  4. Nordic Council of MinistersCanada to host the joint Nordic cultural initiative 2021
  5. Vote for the EU Sutainable Energy AwardsCast your vote for your favourite EUSEW Award finalist. You choose the winner of 2019 Citizen’s Award.
  6. Nordic Council of MinistersEducation gets refugees into work
  7. Counter BalanceSign the petition to help reform the EU’s Bank
  8. UNICEFChild rights organisations encourage candidates for EU elections to become Child Rights Champions
  9. UNESDAUNESDA Outlines 2019-2024 Aspirations: Sustainability, Responsibility, Competitiveness
  10. Counter BalanceRecord citizens’ input to EU bank’s consultation calls on EIB to abandon fossil fuels
  11. International Partnership for Human RightsAnnual EU-Turkmenistan Human Rights Dialogue takes place in Ashgabat
  12. Nordic Council of MinistersNew campaign: spot, capture and share Traces of North

Latest News

  1. As Johnson set to become PM, ministers pledge to resign
  2. Poland's PiS prepares 'failsafe' for October election
  3. Abortion Wars
  4. EU goes on holiday as new UK PM arrives This WEEK
  5. Survey: Half of EU staff 'don't know' ethics rules
  6. Von der Leyen signals soft touch on migrants, rule of law
  7. Timmermans: von der Leyen will be tough on rule of law
  8. Timmermans trolls 'idiot' Brexit negotiators

Stakeholders' Highlights

  1. Nordic Council of MinistersLeading Nordic candidates go head-to-head in EU election debate
  2. Nordic Council of MinistersNew Secretary General: Nordic co-operation must benefit everybody
  3. Platform for Peace and JusticeMEP Kati Piri: “Our red line on Turkey has been crossed”
  4. UNICEF2018 deadliest year yet for children in Syria as war enters 9th year
  5. Nordic Council of MinistersNordic commitment to driving global gender equality
  6. International Partnership for Human RightsMeet your defender: Rasul Jafarov leading human rights defender from Azerbaijan
  7. UNICEFUNICEF Hosts MEPs in Jordan Ahead of Brussels Conference on the Future of Syria
  8. Nordic Council of MinistersNordic talks on parental leave at the UN
  9. International Partnership for Human RightsTrial of Chechen prisoner of conscience and human rights activist Oyub Titiev continues.
  10. Nordic Council of MinistersNordic food policy inspires India to be a sustainable superpower
  11. Nordic Council of MinistersMilestone for Nordic-Baltic e-ID
  12. Counter BalanceEU bank urged to free itself from fossil fuels and take climate leadership

Join EUobserver

Support quality EU news

Join us