Another Keynesian Debt Boondoggle: How Brussels Plans To Turn Zero New Cash Into A $400B Stimulus | David Stockman's Contra Corner

The desperation and fraud of the Keynesian policy apparatus gets more stunning by the day. Apparently, the pettifoggers in Brussels will soon be announcing a new $400 billion bazooka to blast the euro-economy out of its lethargy. This massive new “stimulus” is supposed to spur all manner of infrastructure and private investment that is purportedly bottled-up for want of cheap capital in the private markets.

Are they kidding? Thanks to the Draghi Put (“whatever it takes”) and the hedge fund gamblers who have gone all-in front running the promised ECB bond-buying campaign, this very morning the corrupt and bankrupt government of Spain can borrow all the money it could possibly need for infrastructure at hardly 2.0% for ten years. And any healthy German exporter or machinery maker can borrow at a small spread off the German 10-year bond which is trading at 73 basis points. For all intents and purposes, sovereigns of any stripe and reasonably healthy businesses in most parts of Europe can access capital at central bank repressed rates which are tantamount to free money.

And, yet, these fools want to bring coals to Newcastle. Well, its actually worse than that because not only does Newcastle not need any coal, but the impending “Juncker Plan” doesn’t include any new coal, anyway!

In fact, not a penny of the $400 billion is new EU cash: Its all about leverage and sleight-of-hand. Thus, having apparently failed to notice that most of the sovereigns which comprise the EU are already bankrupt, the Brussels bureaucrats plan to conjure this new “stimulus” money at a 15:1 leverage ratio. That is to say, the actual “capital” under-pinning approximately $375 billion in new EU borrowings amounts to only $26 billion.

But wait. The EU is self-evidently broke—that’s why its dunning Mr. Cameron and even its Greek supplicants for back taxes—so where is it going to get the $26 billion of “capital”? Needless to say, an empty treasury has never stopped Keynesian bureaucrats from dispensing the magic elixir of “stimulus” money.

Thus, it turns out that $20 billion of the Juncker Plan “capital” will consist of member state “guarantees”, not cash in hand. And the remaining $6 billion will consist of already existing European Investment Bank (EIB) funds—–money that is available only because the EIB’s  balance sheet is also “guaranteed” by the same bankrupt member-states which don’t have another nickel to send to Brussels in the first place.

This is called a circle jerk in less polite company. And a pointless one at that.

According to the attached Bloomberg story, the $400 billion pot of stimulus will be used for “seeding investment in infrastructure”  and “to share the risks of new projects with private investors”.

Let’s see.  Can even the duplicitous apparatchiks in Brussels believe that the continent is parched for public infrastructure and that this explains Europe’s stagnation? After all, the peripheral countries are not only buried in debt, but also have been inundated over the past two decades with every manner of highways, public transit and other public facilities that EU funds and their own bloated government budgets could buy.

Spain has world class roads going everywhere on the Peninsula, for example, but its problem is want of loaded trucks to utilize them. The same is true in Italy, which has splendid roads, rails, airports and seaports from the Alps to the tip of the boot, but a private economy that is suffocating in taxes, regulation and corruption. Nor can it be gainsaid that France’s high-speed rail system, Germany’s autobahns or Holland’s canals and dykes have been neglected.

Indeed, to a substantial degree Europe’s sovereign debt crisis is owing to the fact that under the tutelage of its Keynesian policy apparatus, it has been absolutely profligate in building infrastructure owned by the public or subsidized in behalf of crony capitalist “partners”. So why at this late stage of the game does Brussels feel compelled to launch a giant financial shell game designed to generate even more unaffordable infrastructure?

The same question holds for private investment. The very idea that the European economies are “under-invested” in private production capacity is truly laughable. What actually occurred after the mid-1990s, as the single market and single currency went into full swing, was a tsunami of private borrowing and investment.

Between 1996 and 2011, for example, euro bank loans to the private sector nearly tripled, rising at a 7.0% compound rate and leaping from 55% of GDP to 95% during the period.  Nor does that include the additional trillions which were raised in the euro and dollar bond markets by business’ located in the EC.

The plateauing since then is self-evidently not owing to the scarcity of capital or borrowers being rationed out of the market by punitively high interest rates. No, the problem is that there are few credit worthy borrowers left who actually need funds for projects that will generate profitable returns.

In short, the “Juncker Plan” is just another installment of the state-driven financialization that has been 180 degrees off-target, and has actually compounded Europe’s economic malaise. The real problem is statist economics—-that is, welfare state subsidies for inefficiency and non-production, dirigisme and financialization.

Europe has high unemployment, vanishing growth and crushing debts because its all-in labor costs are too high owing to government labor mandates, brutal rates of payroll taxation, coddled unions and subsidized idleness. Likewise, business enterprise, productivity and innovation is thwarted by a triple layer of local, national and EU regulation and nanny-state interference that puts the red capitalists of Beijing to shame.

Stated differently, what is left of European capitalism needs to be liberated from the dead hand of the state. But the crisis of growth, employment and debt that today’s insidious regime of statist Keynesian economics has generated, ironically, is pushing the EC in just the opposite direction. That is, to even more interventionist obstacles to prosperity—- arising from the even more rigid, remote and destructive levels of centralization in the Brussels bureaucracies.

Needless to say, this latest $400 billion shell game is just another monument to the Keynesian paint-by-the numbers affliction that is corroding capitalist prosperity everywhere in the world. When the state tries to micromanage the economy through fiscal maneuvers and central bank intervention it ends up confusing sustainable generation of real wealth with transient headline numbers in the GDP accounts. Indeed, the former can not be generated or targeted by the state at all; it is an unplanable outcome produced by millions of producers, consumers, savers, investors, innovators and entrepreneurs in the real main street economy.

Long ago, Keynes himself pointed out, perhaps inadvertently, the profound difference between GDP and wealth. If we merely want a higher GDP print—-which measures spending, not wealth—governments should handout spoons so that millions of citizens can dig holes and millions more refill them. It would appear that the statesmen of Brussels are fixing to try the modern day equivalent of just that.

By Rebecca Christie at Bloomberg News

he European Union is planning a 21 billion-euro ($26 billion) fund to share the risks of new projects with private investors, two EU officials said.

The new entity is designed to have an impact of about 15 times its size, making it the anchor of the EU’s 300 billion-euro investment program, according to the officials, who asked not to be named because the plans aren’t final. European Commission President Jean-Claude Juncker is due to announce the three-year initiative this week.

The commission will pledge as much as 16 billion euros in guarantees for the vehicle, which will also include 5 billion euros from the European Investment Bank, the officials said. Loans, lending guarantees and stakes in equity and debt will be part of its toolbox, with the goal to jumpstart private risk-taking so that stalled projects can get off the ground.

Juncker’s investment plan aims to combine EU resources and regulatory changes “to crowd in more private investment in order to make real investments a reality,” EU Vice President Jyrki Katainen said on Nov. 14 in Bratislava. The plan is one element of the EU’s economic strategy and “not a magic wand with which we will be able to miraculously invest ourselves out of a difficult economic climate,” he said.

Europe is struggling to spur economic growth as it emerges only slowly from waves of crisis. The 18-nation euro area is forecast to see growth of just 0.8 percent this year, according to EU forecasts, while the region’s unemployment rate of 11.5 percent masks rates of about 25 percent in Greece and in Spain.

‘What We Must’

The euro is on course for a fifth monthly decline after European Central Bank President Mario Draghi said last week that ECB officials “will do what we must” to spur inflation. The single currency was little changed at $1.2404 against the U.S. dollar at 7:38 a.m. in London after declining 1.2 percent on Nov. 21.

While the Juncker proposal involves seeding investment in infrastructure and other fields, the 21 billion-euro sum with a proposed leverage rate of 15 times risks disappointing markets.

Even with additional funds of 30 billion euros and a more modest leverage rate of 10 times, “the plan may not be credible as a start,” Royal Bank of Scotland Plc analysts including Alberto Gallo said Nov. 18. All the same, if the European Central Bank became involved in joint action with the EIB, “it could be a game changer for Europe,” they said.

Broad Range

The fund is designed to make use of existing resources and not require any new cash infusions from member nations, the EU officials said. The EIB will house the fund, which will have its own management and be able take on a broad range of roles. It will be able to operate with fewer restrictions than earlier initiatives, like a project-bond program that is only available to cross-border ventures.

The EU is preparing a list of projects alongside that could take shape quickly. Because the fund will be able to bear some of the risk of starting projects, it may offer a way around national budget constraints and private-sector reluctance to take on new risk, according to the officials.

“We need a step change in efforts to tackle the obstacles hampering private investment and to optimize the use of public investment in Europe,” Emma Marcegaglia, president of the BusinessEurope federation of employer groups, said on Nov. 21. The group released a report on investment in Europe calling for the EU to lower national barriers, improve regulation and lower the costs of doing business inside the 28-nation bloc.

http://www.bloomberg.com/news/2014-11-23/how-the-eu-plans-to-turn-26-billion-into-390-billion.html