A European Fund for growth and development

, by Alberto Majocchi

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A European Fund for growth and development

Over the last few months many steps forward have been taken towards an effective governance of the Eurozone in order to guarantee financial stability, through the signature of the Treaty on Stability, Coordination and Governance (i.e., the Fiscal Compact), the Six Pack and the Two Pack Agreement. Furthermore, there is now general consensus that every country is obliged to pay off its own debt accumulated in the past. The way is open to ensuring that financial stability will be pursued by each Member State within the Eurozone, under strict European control.

However, fiscal consolidation will be difficult to achieve if a strong recovery of the European economy is not rapidly started. There is no national way out of the crisis. Expansionary measures are impossible at the level of Member States, which are obliged to choose fiscal consolidation as a priority; and in any case they would be domestically ineffective since most of the effects resulting from national measures would be lost through increased imports from other European countries. Therefore, every country will try to behave as a free rider, waiting for expansionary measures to be implemented by other Eurozone Member States, and stabilisation policy will prove sub-optimal

Structural reforms are urgently needed and unavoidable in indebted countries to improve productivity and increase competitiveness, but they will produce positive results only in the medium and long term. Therefore, the only possible way to overcome the crisis, i.e., by launching a new phase of growth and promoting an increase in employment, seems to be linking the fiscal consolidation policy of each Member State to the immediate creation of a European Fund for Growth and Employment.

Concerning this Fund, two issues should be addressed: which financial means should be used and what type of expenditures should be promoted. On February 14th, 2013 the European Commission put forward a “Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax” (FTT). According to a previous proposal tabled by the Commission on November 9th, 2011, which the European Council on February 7th-8th, 2013 invited the participating Member States to carefully examine, this tax revenue should be used at the European level since the financial market is unified in accordance with European rules. The Commission estimates that the FTT revenue, if implemented only by the 11 countries that have decided to proceed with the Enhanced Cooperation, could amount to 31 billion euros.

If these resources were mostly allocated to the new Fund, it would be possible to launch a recovery plan providing for an amount of investments equal in the short-medium term to 1 point of the GDP of the area, using resources from the private sector or the EIB as well. The main goal of these investments should be to complete the existing infrastructure network (energy, transport and broadband) and promote technological innovation within a European economy that has by now reached the technological frontier and needs further impetus to compete successfully on the world market.

Huge investments, from both the public and private sector, are needed to meet the infrastructure challenge. According to the Commission’s preliminary estimates the necessary investments will amount to between €1,5 trillion and 2 trillion in the sectors of energy, transport and the ICT network. From 2020 to 2050, €550 billion will be needed for the implementation of the Trans- European Transport Network (TEN-T) programme, of which €215 billion are set aside for the removal of the main bottlenecks in the core transport network. Regarding the energy sector, expenditure should amount to €400 billion on distribution networks and smart grids, €200 billion on transmission networks and storage as well as €500 billion on the upgrading and building of new generation capacity. Finally, between €180 and 270 billion in capital investment are required to provide all households with fast and ultra-fast broadband by 2020.

The Fund could immediately start to finance these projects, while preparing a plan to be implemented within a short period of time to improve the competitiveness of the European economy through investments in higher education, research and technological innovation. A smaller amount of the FTT revenue could be used to support structural reforms in Member States which are willing to conclude agreements of a contractual nature with EU institutions through limited, temporary, flexible and targeted financial incentives - the Convergence and Competitiveness Instrument suggested by the Commission in the Blueprint for a Deep and Genuine EMU (November 28th, 2012).

However, if an “adequate fiscal capacity” is created within the Eurozone through the implementation of the FTT and, in perspective, through the introduction of a carbon tax to help fight effectively against climate change and curb CO2 emissions, the democratic control of the use of these resources should be guaranteed as has been acknowledged in the Commission’s Blueprint and more cautiously accepted in the Report presented by the President Van Rompuy to the European Council of December 13th-14th, 2012.

“No taxation without representation” is a fundamental principle of democracy. Therefore, the Commission has rightly underlined that that “the progress towards a deep and genuine EMU would over the medium term necessitate a structure akin to an EMU Treasury within the Commission to organise the shared policies undertaken with the common fiscal capacity to the extent that they imply common resources and/or common borrowing”. It is clear that this new budgetary authority that will be responsible for managing joint resources and governing the European economy should be democratically controlled by the European Parliament and the Council. The way will be open for the evolution of the EMU towards a full federation, initially in the economic and monetary field, but that must gradually include competences in matters of defence and foreign policy as well.

Today this perspective seems more realistic after the statement of President Hollande supporting the creation of an economic government that would manage the Eurozone fiscal capacity and bonds issue, with the goal of achieving a political Union in two years from now. It is not clear whether the new envisaged institutional structure is truly democratic and, hence, of federal nature. However, the French position re-launches the fight for the European federation and, in such perspective, the immediate activation of the Fund can contribute starting the process that should bring to an effective political union in Europe, as wished by the German government and now by President Hollande.

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