WEEKLY COMMENT 2-07-2015
By Barry Edwards
Grand Plan for the EU
The result of the referendum in Greece on Sunday is the decision that will affect the future of the EU in ways we cannot predict at the moment. With that in mind, the EU needs to concentrate on what it would like to achieve over the next few years whatever the outcome of the vote. The comment this week is about suggesting a grand plan for the EU that could be implemented and maybe help to decide how to resolve the Greek crisis.
The purpose of the grand plan is intended to address the misconceptions and hardship of many people who find it difficult to appreciate what the politicians are trying to do who seem to struggle to get that message across to the people especially in the southern half of the union.
The plan involves schemes and practises that are already in place within the EU which are coordinated in a simple format to allow everyone to become involved in achieving the original intention that most people believed was convincing. The grand plan has four main strategies which could be adopted by the leaders of the EU and instigated in a short time frame.
- Currently the European Central Bank (ECB) is purchasing government stock from all member countries of the EU at the rate of €60 billion a month under the quantitative easing scheme with a limit of €1200 billion which can be increased if deemed necessary. It is proposed that this is expanded to achieve the purpose of reducing the level of government debt to Gross Domestic Product (GDP) for all member countries to 80% (not all countries are above this level). This would involve extra purchases of about €500 billion over the course of the current programme. The stock purchased is then converted to long-term debt with today’s low interest rates and held by the ECB until sufficient surplus budget funds are generated by members to repurchase it during the period of the loan. It is normal practice for the ECB to reimburse the interest paid to the relevant country.
- The European Parliament has just endorsed the new plan proposed by Jean-Claude Juncker to provide infrastructure funding for the EU which has been set up by the European Investment Bank (EIB). It is proposed that this scheme under the heading of European fund for strategic investment (EFSI) is expanded substantially and the government stock held by the ECB is used as collateral to support the bank lending that will initially provide the finance for the projects. It is also proposed that commercial projects are included especially for smaller companies that cannot access the capital markets for finance. The EIB indemnifies the ECB against any claims against the collateral. The ECB has a securities lending programme in place to provide support to the efficient operation of the securities markets. This could be adapted to provide the collateral provision proposed. The ECB would charge an annual rate for lending the bonds; it currently charges a weekly rate of 0.04% for this service when it is used. For the long-term commitment it is suggested that a rate of 2% is charged. The normal securities lending would continue to function normally.
- The European Commission needs to define precisely the rules for EU countries that are not members of the Eurozone. There is currently a conflict between ‘the ever closer financial union` for the Eurozone which does not apply in many instances to non-members. The main point here is that non-Eurozone countries should be able to participate via their central banks in the grand plan in coordination with the ECB. Until there is clarification of the relationship between the two groups this could be a problem.
- Training; currently there is a shortage of engineers of all skills in the EU and elsewhere in the developed world which will need to be addressed since the investment proposed will create enormous demand for this expertise. The colleges providing this training should be increased and expanded in conjunction with more apprenticeships in the workplace. This is a programme that is being implemented by the EU but it requires more funding to fulfil the future demand created by the investment plan.
Point 1 and 2 above have been kept very brief but if you wish to understand how the plan works in detail, please click on the Economic Development Plan in the right hand column of this page under ‘Categories`.
The grand plan utilises programmes already active or does not involve any new organisations to make it happen; all that is required is agreement and the plan can proceed. The message is easily understood by people not involved in the financial world and it achieves most of the ambitions that have been discussed within EU circles. The main accomplishments that would be realised are:-
- Unemployment would be reduced in mainland Europe providing real for hope for the younger generation.
- The impact of the grand plan would improve economic growth dramatically helping to restore the prospects originally intended by the EU project.
- Tax revenue would increase in all countries from the investment made helping to alleviate budget deficits currently causing severe strain in many countries.
- The extra funds will pay for the government financial commitment to gradually pay off the bonds created when the infrastructure projects are completed.
- The infrastructure of the EU would be improved without increasing government debt and allow for proper budget planning in this sector in conjunction with the EFSI, something that is desperately required by all member countries.
- Pension and investment funds would have a wide range of bonds to invest in to provide the income for their pensioners and savers which would comply with the Capital Markets Union proposal currently being implemented.
- Many manufacturing companies large and small would benefit from the increased investment in the EU allowing them to invest and expand.
- Professional service businesses would have much more work designing and planning the projects which would happen as soon as the grand plan was underway.
- Many people would have a lot more faith in the potential of the EU project.
- Most of the problems in Greece could be resolved if the plan was implemented quickly.
- Some countries with excessive government debt will secure substantial budget deficit relief.
- The financial markets will have much more confidence in the EU and the Eurozone.
- Other world powers will be relieved that the EU will survive and be able to participate properly in world discussions as a fully functioning union and improve world trading opportunities.
Those are the main points that are achieved by the grand plan and the major advantage is that the cost to the EU and national budgets is negligible initially. The planned extra expenditure incurred over the years is perfectly manageable for developed countries growing and expanding their economies. Business would have an enormous improvement in revenues and profits helping to improve the living standards of many Europeans.
The grand plan is a framework for others to improve upon and if you have any suggestions, please make them known via the comment facility below.
That’s all for this week, more observations next week.