Tuesday

6th Dec 2022

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

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe 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.

Serbia now has no choice but to join EU sanctions on Russia

Vladimir Putin himself is somewhat suspicious of Serbia's leader, as are most who deal with the opaque Aleksandar Vucic. The Russian president has preferred to keep his Serbian counterpart compliant, via a tight rein of annually-reviewed gas pricing.

EU must break Orbán's veto on a tax rate for multinationals

This global tax rate for multinationals could yield up to €64bn annually. Yet, the Hungarian government led by Viktor Orbán has been blocking it for months. The impotency of the EU to strike a deal is irresponsible and incomprehensible.

EU must break Orbán's veto on a tax rate for multinationals

This global tax rate for multinationals could yield up to €64bn annually. Yet, the Hungarian government led by Viktor Orbán has been blocking it for months. The impotency of the EU to strike a deal is irresponsible and incomprehensible.

Stakeholders' Highlights

  1. Nordic Council of MinistersCOP27: Food systems transformation for climate action
  2. Nordic Council of MinistersThe Nordic Region and the African Union urge the COP27 to talk about gender equality
  3. International Sustainable Finance CentreJoin CEE Sustainable Finance Summit, 15 – 19 May 2023, high-level event for finance & business
  4. Friedrich Naumann Foundation European DialogueGender x Geopolitics: Shaping an Inclusive Foreign Security Policy for Europe
  5. Obama FoundationThe Obama Foundation Opens Applications for its Leaders Program in Europe
  6. EFBWW – EFBH – FETBBA lot more needs to be done to better protect construction workers from asbestos

Latest News

  1. EU countries struggle to crack Hungary's vetos
  2. Frontex expanding migrant route-busting mission in Balkans
  3. EU ministers in fresh battle on joint debt, after Biden subsidies
  4. EU: 'We'll see' if Moscow actually stops selling oil over price-cap
  5. Bad Karma
  6. Serbia now has no choice but to join EU sanctions on Russia
  7. Hungary's funds showdown in focus This WEEK
  8. EU must break Orbán's veto on a tax rate for multinationals

Stakeholders' Highlights

  1. European Committee of the RegionsRe-Watch EURegions Week 2022
  2. UNESDA - Soft Drinks EuropeCall for EU action – SMEs in the beverage industry call for fairer access to recycled material
  3. Nordic Council of MinistersNordic prime ministers: “We will deepen co-operation on defence”
  4. EFBWW – EFBH – FETBBConstruction workers can check wages and working conditions in 36 countries
  5. Nordic Council of MinistersNordic and Canadian ministers join forces to combat harmful content online
  6. European Centre for Press and Media FreedomEuropean Anti-SLAPP Conference 2022

Join EUobserver

Support quality EU news

Join us