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.

 

(emphasis added)

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.

 

1-EU government deficits

 EU government deficits (annual) as a percentage of GDP – click to enlarge.

2-EU-Government debtEU government debt 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.

 

(emphasis added)

 

Conclusion:

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.

 

European Commission President Juncker addresses a news conference at the European Commission headquarters in BrusselsJC 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

 

 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

2 Responses to “EU – Planning to Spend Money It Doesn’t Have”

  • No6:

    I disagree about the multiplier effect. It certainly does exist, it is just that the multiplier is some fraction of a whole number, less than 1. With Junkers’ brilliant plan the multiplier could easily be 1/10 or less.

    • worldend666:

      The problem is any multiplier effect will create dependencies which will vanish once the initial spending boost comes to an end. Temporary jobs will have been created which will need to be liquidated, creating civil unrest.

      Obviously it’s better only to create jobs to serve a recurring demand.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • LA5H5981sc
President George W. Bush presents the Presidential Medal of Freedom to Federal Reserve Chairman Alan Greenspan, one of 14 recipients of the 2005 Presidential Medal of Freedom, awarded Wednesday, Nov. 9, 2005 in the East Room of the Whiite House.  White House photo by Shealah CraigheadAlan “Bubbles” Greenspan Returns to Gold
      Faking It   Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961   He was in it for the power and the glory... Alan Greenspan gets presidential bling...
  • William SimonEnd of an Era: The Rise and Fall of the Petrodollar System
      The Transition   “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul   A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
  • Vote Early Zombie at Sharpstown High SchoolWriting on the Wall
      Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so.   It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh   We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
  • robot tradersA Fully Automated Stock Market Blow-Off?
      Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals.  The bots keep buying... Illustration via...
  • Toscana_Siena3_tango7174The Central Planning Virus Mutates
      Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination.   A...
  • tokyo whaleDestination Mars
      Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks.  If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical.  But, in certain economies, this is now standard operating procedure.   The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
  • The-Deep-State-Mike-LofgrenAmerica Has Become a “Parasitocracy”
      Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to.   Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
  • London-City-Scene lo rezFat People for Trump!
      Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot.   The protest vote attractor with the funny hair. Image credit: Liberty Maniacs   Trigger warning: In the following ramble, we make fun of...
  • bristlecone-1000x672Long Term Market Perspectives
      Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world.   Ye olde bristlecone Photo credit: Kosta Konstantinidis   You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
  • Juncker, Keqiang, Tusk 2EU Sends Obsolete Industries Mission to China
      “Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”)  and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
  • chart-4-silver-basis and cobasisGold is not Going to $10,000
      One Cannot Trade Based on the Endgame The prices of the  metals were down again this week, -$15 in gold and more substantially -$0.57 in silver. Stories continued to circulate this week, hitting even the mainstream media. Apparently gold is going to be priced at $10,000. Jump on the bandwagon now, while it’s still cheap and a bargain at a mere $1,322!   All aboard... or maybe not? It all depends on what one wants to achieve – there's many a slip 'twixt the cup and the...
  • Purchasing Power of the BuckThe Real Reason the “Rich Get Richer”
      Time the Taskmaster DUBLIN – “Today’s money,” says economist George Gilder, “tries to cheat time. And you can’t do that.” It may not cheat time, but it cheats far easier marks – consumers, investors, and entrepreneurs.   Tempus fugit – every action humans undertake has to take time into account. In the economy, interest rates serve as the signal and regulator of the inter-temporal structure of capital. In an unhampered free market economy, they tell...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com