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 Sector: Positioning and Sentiment
A Case of Botched Timing, But... When last we wrote about the gold sector in mid February, we discussed historical patterns in the HUI following breaches of its 200-day moving average from below. Given that we expected such a breach to occur relatively soon, the post turned out to be rather ill-timed. Luckily we always advise readers that we are not exactly Nostradamus (occasionally our timing is a bit better). Below is a chart of the HUI Index depicting the action since the January...
- India: The next Pakistan?
India’s Rapid Degradation This is Part XI of a series of articles (the most recent of which is linked here) in which I have provided regular updates on what started as the demonetization of 86% of India's currency. The story of demonetization and the ensuing developments were merely a vehicle for me to explore Indian institutions, culture and society. The Modimobile is making the rounds amid a flower shower. [PT] Photo credit: PTI Photo Tribal cultures face...
- The Long Run Economics of Debt Based Stimulus
Onward vs. Upward Something both unwanted and unexpected has tormented western economies in the 21st century. Gross domestic product (GDP) has moderated onward while government debt has spiked upward. Orthodox economists continue to be flummoxed by what has transpired. What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity. Although the fat lady has so far only...
- Welcome to Totalitarian America, President Trump!
Trump vs. the Deep State If there had been any doubt that the land of the free and home of the brave is now a totalitarian society, the revelations that its Chief Executive Officer has been spied upon while campaigning for that office and during his brief tenure as president should now be allayed. Image adapted from the cover of “Deep State #5” - depicting an assassin from the future President Trump joins the very crowded list of opponents of the American...
- Boosting Stock Market Returns With A Simple Trick
Systematic Trading Based on Statistics Trading methods based on statistics represent an unusual approach for many investors. Evaluation of a security's fundamental merits is not of concern, even though it can of course be done additionally. Rather, the only important criterion consists of typical price patterns determined by statistical examination of past trends. Fundamental considerations such as the valuation of stocks are not really relevant to the statistics-based trading...
- Searching for Truth
Heresy or Truth? RANCHO SANTANA, NICARAGUA – In the fifth century, Christian scholars counted 88 different heresies. Arianism. Eutychianism. Nestorianism. If there was a way to “offend” God, they had a name for it. One group of “heretics” argued that there was no such thing as “original sin.” Another denied the trinity. And another claimed Jesus was not divine. Which one had the truth? Depiction of the first Council of Ephesus in 431 AD, convened by Emperor...
- March to Default
Style Over Substance “May you live in interesting times,” says the ancient Chinese curse. No doubt about it, we live in interesting times. Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.” Well, Maxine Waters is obviously right – impeaching the president is an urgent...
- Why the 21st Century Sucks - Turtles All the Way Down
A Truly Sucky Century BALTIMORE – What an awful century! Worst we’ve ever seen. Household incomes are down. Employment is down, with 7 million people in the U.S. of working age without jobs. Productivity growth is down. GDP growth is down – to only about 0.5% per capita last year. Even life expectancies are down. Drug overdoses are up. Suicides are up. One out of every eight children lives in a family getting food stamps. One of out every eight adults takes psychoactive drugs...
- Gold and the Fed's Looming Rate Hike in March
Long Term Technical Backdrop Constructive After a challenging Q4 in 2016 in the context of rising bond yields and a stronger US dollar, gold seems to be getting its shine back in Q1. The technical picture is beginning to look a little more constructive and the “reflation trade”, spurred on further by expectations of higher infrastructure spending and tax cuts in the US, has thus far also benefited gold. From a technical perspective, there are indications that the low at $1045.40,...
- The Unstable Empire – A Campfire Tale
Campfire Tale Caesar: The Ides of March are come. Soothsayer: Ay, Caesar, but not gone. — Julius Caesar, Shakespeare GRANADA, NICARAGUA – Today, we stop the horses and circle the wagons. For 19 years, we have been rolling along, exploring, discovering. We began with the assumption that we didn’t “know” anything - so we kept our eyes open. Now we know even less. Famous people who knew nothing and were not shy to admit it: Sergeant Schultz...
- Off the Beaten Path in Mesoamerica
Greeted by Rooster There’s an endearing quality to a steadfast rooster call at the crack of dawn when overheard from a warm country farmhouse. There’s a reassuring charm that comes with the committed gallinaceous greeting of daybreak that’s particularly suited to a rural ambiance. The allure of a morning cock-a-doodle-doo somehow falls flat in all other settings. Good morning everyone! Before meteorological forecasts were available on TV and smart phones, people...
- Why Silver Went Down – Precious Metals Supply and Demand
Rumor-Mongering vs. Data The question on the lips of everyone who plans to exchange his metal for dollars—widely thought to be money—is why did silver go down? The price of silver in dollar terms dropped from about 18 bucks to about 17, or about 5 percent. Reportedly silver was already assassinated in the late 19th century... so last week they must have assassinated its corpse. [PT] Illustration taken from 'Coin's Financial School' The facile answer is...