By Stelios Papadopoulos
ON September 13 Eurozone finance ministers discussed proposals for leveraging private investments to relaunch the continent’s moribund economy. Italian Finance Minister Pier Carlo Padoan told reporters at a meeting Saturday of finance ministers from the 28 EU nations that most of the resources for an envisioned investment fund would come from private sources.
Padoan said the ministers were focusing on ways governments could leverage those investments. That could include incentives, regulatory simplification and better use of public money. Padoan said it is up to governments to facilitate private investments. European ministers were holding their first meeting since ECB (European Central Bank) chief Mario Draghi outlined a three pillar strategy to save the eurozone’s economy.
Saturday’s session focused on a proposal for €300 billion in investments to revive the eurozone economy. But the session also follows calls from Poland for a €700 billion investment fund increasing the number of calls for shifting Europe’s focus away from austerity. As is well known France and Italy are putting pressure on Germany to relax the strict spending limits of the stability and growth pact.
The content however of the investment plan has yet to be decided. The ministers have tasked the European Investment Bank and the European Commission to draft a report by October. What is almost certain by now is that the funds will come from the EIB since according to Bloomberg, the German proposal that was presented at the ministerial meeting made explicit reference to the funding potential of the bank.
This is even more likely given German opposition to any relaxation of the Stability Pact’s rules and increased government borrowing for investments. Germany’s move is extremely surprising to say the least and makes one wonder why did they decide to change their stance now. The fact that the eurozone is approaching extremely dangerous levels of inflation is simply not a good enough explanation.
Such low levels of inflation have been evident for quite some time. The only way to understand such a shift is by juxtaposing Germany’s reaction to Mario Draghi’s recent speech at Jackson Hole. Doing so forces one to reconsider current interpretations of his speech.
In his speech Draghi points out that countries with stronger budgets such as Germany should do more to rescue the eurozone from its deep recession. Most interpretations point out the obvious fact that the countries Mr Draghi is referring to are basically one and it is Germany. Yet what such interpretations miss is that Draghi has been always very accommodative to German concerns.
He would never embark for example on a quantitative easing programme-precisely because Germany would oppose the government bond buying a QE programme entails-and he would naturally never suggest to Europe’s leader that it should stimulate the eurozone’s economy-an extremely unpopular option for German voters and hence German politicians. One phrase and its consequent effect reveals his thinking. Draghi points out in his speech the dangers of low inflation adding that the ECB will use ‘’all available instruments’’ to combat it. The aftermath of that speech was a surge in the Euro as investors interpreted his statements as a readiness to initiate a QE programme if need be.
Suppose you are Angela Merkel watching all this. How will you interpret such events? Financial markets are obviously putting pressure on Draghi to embark on a QE program in order to avert a deflationary disaster, while Draghi signals to investors that the ECB will as he said ‘’use all available instruments’’ to combat the problem.
At the same time though he is, as already pointed out, making it very clear that Germany can use fiscal policy to battle the problem. Draghi then is basically saying to Germany that his hands are tied. He is facing pressure from the markets to start buying bonds and the only way to avert this is if Germany does something. Whether Merkel interpreted the events in such a way or whether Draghi clarified his message by telephone is beside the point. Germany’s reaction in the aftermath of Draghi’s speech cannot be explained otherwise. If investors though are not satisfied with October’s proposal, watch the ECB print money.
Stelios Papadopoulos MSc Political Economy, is a Political Risk Analyst