The Press Takes Notice of a Small Problem
We have previously discussed the plans announced by EU commission president JC Juncker to “rescue” the euro area economy by means of € 300 billion of state-directed spending (see “Juncker’s Solution” for details). Now the mainstream press is also beginning to wonder where the money for this ambitious spending plan is supposed to be coming from.
A report by Reuters contains a few points worth commenting on:
“New European Commission President Jean-Claude Juncker is preparing a 300 billion euro ($375 billion) investment plan he will present as a cornerstone of efforts to revive an ailing economy. But history suggests the program risks becoming an exercise in financial engineering rather than a conduit for the new money the region needs to help boost output and create jobs.
A flagship project of the new European Union executive, the investment scheme is due to be unveiled before Christmas. It is still being finalized and few details have been made public. If all the money it promises is raised and spent, it could provide the 28-nation EU with roughly an additional 0.7 percent of GDP in investment per year over three years.
“It is significant,” said Carsten Brzeski, economist at ING bank in Frankfurt. “You would expect some kind of a multiplier effect from investment on jobs and purchasing power and it would increase the growth potential. The downside is that public investment can take years before it gets started.”
But even more than “when?”, the big question hanging over the plan is “how much?”. The 300 billion euros is an overall target for both the public and private money that the Commission hopes to mobilize. The Commission itself does not have any money and is funded through annual EU budgets that must be balanced. Of the region’s 28 governments, only Germany seems to have public finances strong enough to significantly increase investment. But in its drive to have a balanced budget, Berlin is not keen to spend more.
So the Commission plans to use what little public money is available to lure bigger private funds into projects that would otherwise seem too risky or with too low a rate of return.
“Our aim is to ‘crowd in’ private money for big infrastructure projects in the energy sector, transport, broadband or research and development. The private sector cannot take all the risks,” Commission Vice President Jyrki Katainen told Reuters.
First of all, the money can evidently not be raised by EU governments if they try to fulfill the obligations of the fiscal compact. To this we would note that the compact, if anything, suffers from still not being truly enforceable when it comes to larger member nations such as France and Italy. From our perspective, the attempt to impose some sort of fiscal discipline is praiseworthy in principle, but the actual approach to “austerity” and economic reform leaves a lot to be desired, to put it mildly.
Unfortunately the compact does not contain a specific clause with respect to spending – it merely refers to debt and deficits as a percentage of GDP. As a first measure, several countries have taken steps to artificially boost their GDP statistics by adding what seem highly subjective estimates of the value added by drug dealing, prostitution and other “black market” activities to the data. Worse though is that wherever possible, governments have avoided shrinking the State, and have instead imposed new burdens on the private sector, in many cases coupled with draconian enforcement. The additional taxes harm the economy, while the more drastic enforcement is obviously detrimental to liberty and peace, as it requires additional invasions of privacy, encourages snitching, and so forth.
EU government deficits (annual) as a percentage of GDP – click to enlarge.
A Plan that Will Consume Scarce Capital
Secondly, the belief in a “multiplier effect” once again runs into the problem that capital is both heterogeneous and scarce. If it is employed in state-directed investment projects, it must be removed from other employments. It is an apodictic certainty that in the vast majority of cases, it would be better employed in undertakings to which market participants have allocated it voluntarily. It seems obvious that investment projects planned by bureaucracies lack an important ingredient, namely the profit motive. They have therefore no reason to compare input costs to expected returns and to decide whether to undertake certain projects on that basis – and yet, the real capital to pursue these projects will have to be freed up elsewhere.
In the article excerpted above it is in fact admitted that the planned investment projects wouldn’t be touched by the private sector because they do not promise an adequate return. It really takes some doing for long-range investment projects to be so wasteful that they are seemingly not even able to produce a large enough illusory profit when the central bank’s administered interest rate stands almost at zero. Obviously, the private sector could and would gladly “take the risks” associated with these projects if they promised to produce profits in excess of the returns available in other investments. The fact that higher returns are available elsewhere is the market’s way of telling entrepreneurs that there are consumers wants the satisfaction of which is more urgent.
The lack of returns proves ipso facto that the proposed projects are destined to waste scarce capital. The so-called “multiplier effect” is an illusion – it is certainly possible for capital consumption to masquerade as “growth” for a while, but its true nature will eventually always be revealed.
As Mises noted to this:
“Today the majority of the citizens look upon government as an agency dispensing benefits. The wage earners and the farmers expect to receive from the treasury more than they contribute to its revenues. The state is in their eyes a spender, not a taker. These popular tenets were rationalized and elevated to the rank of a quasi-economic doctrine by Lord Keynes and his disciples. Spending and unbalanced budgets are merely synonyms for capital consumption.”
In reality, these spending programs are simply slightly more elaborate and sophisticated versions of Keynesian ditch digging. They make precisely as much sense. If European politicians really want to help to spur economic growth, they must bid adieu to the notion that economies can be “jump-started” by spending on undertakings that are mainly characterized by their inability to produce a return. What is instead needed is a repeal of the ubiquitous red tape hampering entrepreneurs, lower taxes and less government involvement in the market economy.
Top-down investment decrees are bound to do more harm than good in the end. The urge of local governments in Spain to build a new airport in every two-bit town during the boom has left the landscape dotted with a number of large mute witnesses attesting to this.
JC Juncker: trying to spend money he doesn’t have on projects that everybody knows already won’t produce a return. It is not exactly the most brilliant plan ever conceived.
(Photo via Reuters)
Charts by: Euro-Stat
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
2 Responses to “EU – Planning to Spend Money It Doesn’t Have”
Most read in the last 20 days:
- Gold - Ready to Spring Another Surprise
Sentiment Extremes Below is an update of a number of interesting data points related to the gold market. Whether “interesting” will become “meaningful” remains to be seen, as most of gold's fundamental drivers aren't yet bullishly aligned. One must keep in mind though that gold is very sensitive with respect to anticipating future developments in market liquidity and the reaction these will elicit from central banks. Often this involves very long lead times. Blackbeard's...
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...