Poland's finance minister called on Thursday for the creation of a European Fund for Investments that would be able to finance, through leveraging its own capital, 700 billion euros (us$906.4 billion) worth of investment, to revive the stagnant European economy.
The fund could be a special-purpose vehicle under the umbrella of the European Investment Bank Group, the existing EU bank owned by European governments, Mateusz Szczurek told an annual dinner of the Bruegel think tank, which often researches ideas for EU institutions. The additional resources should supplement - not replace - European Investment Bank financing and the multiple functions of the EU budget, he said.
"To start operating, the new vehicle would require a gradual injection of paid-in capital and guarantees by all EU member states, in a similar way and on the similar scale as was done for the European Stability Mechanism," Szczurek said in a prepared speech. The ESM, the euro zone bailout fund, has 80 billion euros of paid-in capital and 620 billion in callable capital, which enables it to raise 500 billion euros on the market in case a euro zone sovereign needs emergency financing.
"The capital of the Fund would be leveraged by borrowing in the financial market and directly invested in the selected infrastructure projects because Europe needs actual capital expenditures, not merely extra funding," Szczurek said. Such a structure would be necessary to ensure its triple-A credit rating, he said. All 28 European Union countries should take part in the fund "to prevent free-riding."
To avoid widening the budget deficits of EU countries, the capital contributions to the fund would be excluded from the calculation of the budget deficit under EU rules, Szczurek proposed. Also, its borrowing on financial markets would be recorded as the fund's debt, and not re-routed to the books of governments. "This treatment would be exactly the same as it is the case under the ESM, and in line with the rules underpinning the Stability and Growth Pact," Szczurek said.
Top European policy-makers see structural reforms and investment as key methods of boosting European economic growth, at a time when most governments are still trying to consolidate public finances and interest rates are at record lows. Szczurek said that based on conservative assumptions about the size of the current output gap and fiscal multipliers, Europe needs public investment of around 5.5 percent of European Union GDP, or 700 billion euros, over the medium term. "The capital spending would start at 0.5 percent of European GDP in 2015, peak at 2 percent in 2017, and be gradually phased out afterwards," Szczurek said in his speech.
Such a path would allow time for large-scale public investment projects to get started and give policymakers time to react and adjust if economic conditions change in time. Through leveraging, the fund would help direct the currently idle private savings towards large-scale, pan-European infrastructure projects, with particular focus on energy, transportation and ICT, Szczurek said.
Szczurek said now was a good moment to create such a fund because interest rates are at record lows, the impact of investment in a depressed economy is potentially large and demand and growth would be stimulated over the long term. "Consider the additional publicly owned capital stock. Consider the evidence that public investment may actually reduce debt in the medium term and strengthen long-term sustainability. And consider the alternative: the risk of secular stagnation, which may already be with us. Do we really have a choice?" he said.