A few months ago, 25 of the 27 members of the EU solemnly signed a treaty that committed them to enshrining tough deficit limits in their national constitutions. This so-called “fiscal compact” was the key condition to get Germany to agree to increase substantially the funding for the eurozone’s rescue funds, and for the European Central Bank to conduct its 1 trillion euro “long-term refinancing operation” (LTRO), which was essential to stabilizing financial markets.
Today, however, the eurozone’s attention has shifted to growth. This is a recurring pattern in European politics: austerity is proclaimed and defended as the precondition for growth, but then, when a recession bites, growth becomes the precondition for continued austerity.
About 15 years ago, Europe endured a similar cycle. In the early 1990’s, when the plans for the European Monetary Union were drawn up, Germany insisted on a “Stability Pact” as a price for giving up the Deutschmark. When Europe fell into a deep recession after 1995, attention shifted to growth, and the “Stability Pact” became the “Stability and Growth Pact” (SGP) when the European Council adopted a resolution on “growth and employment” in 1997.
The need for growth is as strong today as it was 15 years ago. In Spain, the unemployment rate then was as high as it is now, and in Italy, it was higher in 1996 than it is today. Politically, too, the background is the same: The “G” was inserted into the SGP under pressure primarily from a new French administration (at the time headed by then-French president Jacques Chirac). Today, France has again given the political impetus for a shift to growth.
Making growth a political priority is uncontroversial (after all, who could be against it?). However, the real question is: What can Europe do to create growth? The honest answer is: rather little.
The key elements of a growth strategy discussed among Europe’s leaders these days are actually the same as in 1996-1997: labor-market reforms, strengthening of the internal market, more funding for the European Investment Bank (EIB) for lending to small and medium-size enterprises (SMEs), and more resources for infrastructure investment in poorer member states. The last two, in particular, attract a lot of attention because they involve more spending.
However, circumstances are also quite different today. The EIB’s business model would have to be radically changed to make it useful to promote growth, because it lends only against government guarantees, whereas southern Europe’s fiscally stressed sovereigns cannot afford further burdens. Moreover, contrary to a popular misconception, the EIB cannot lend directly to SMEs. The EIB can only provide large banks with funding to lend to local SMEs, but the ECB is essentially already doing this with its three-year LTRO loans.
There is also talk about a “Marshall Plan” for southern Europe. Fifteen years ago, there was a clear need for better infrastructure there. However, since then, the southern countries have had a decade of rather high infrastructure investment — more than 3 percent of GDP in Spain, Greece and Portugal.
As a result, most countries in the EU’s south probably have a sufficient stock of infrastructure today. In fact, more infrastructure investment would actually make most sense in Germany, where infrastructure spending has been anemic (only 1.6 percent of GDP, or half the rate of Spain) for almost a decade. That is why Germany’s famous Autobahnen are notoriously congested nowadays.