"Budgetary discipline is indeed necessary, but projects are indispensable". Jean-Laurent BONNAFÉ, Director General of BNP Paribas, a leading French bank; see Le Monde (Paris) 17th May 2012.

In the current economic gloom, growth is our Holy Grail; our only hope of escape from the torpor of pessimism, of stagnation, of chronic unemployment. The search for growth tops the agenda of every European government, and of many others. For without it, we would be condemned to persistent recession, an ideal diet for extremist political movements such as the Front National in France or Χρυσή Αυγή (Chryssi Aughi = Golden Dawn) in Greece, which even displays neo-Nazi tendencies.

In view of the sufferings of Greece at Nazi hands during World War II, it seems entirely irrational for Greeks to support a neo-Nazi movement. But there you are; popular exasperation can bring forth absurdities and monstrosities. It is of prime importance to nip them in the bud by tackling the causes of exasperation.

Those who talk about “throwing Greece out of the euro club” are, in my view, talking nonsense. It can hardly make sense to expel a member who owes the club a great deal of money; she might retaliate by repudiating her entire debt and declaring herself bankrupt. The most desirable solution is surely to keep the Greeks on board, allowing them sufficient time to put their house in order, without wrecking the house by unduly hurrying the process.

The need for patience

Our current problems are the results of thirty to forty years of lax budgeting and flabby regulation by governments and, in the financial world, perversely excessive competition, gross mismanagement and rampant greed. There is no rapid remedy; it will take quite a few more years to clear up the mess. Patience is needed; and patience is what financial markets lack. That is why most of the Greek government’s debts have been taken over by public institutions like the International Monetary Fund, the European Central Bank and the European Financial Stabilisation Fund, which have more capacity for patience than commercial banks or hedge funds. Fortunately, it appears that Angela Merkel, François Hollande, the ECB, the IMF and the majority of Greeks all want Greece to remain in the eurozone.

The adjustable corset

Everyone complains that the European budgetary agreement reached late last year is an unduly tight, inflexible, rib-cracking corset. That is not entirely true; in practice, the corset seems to be adjustable. Spain has had her budget deficit target for 2012 relaxed from 4.4% to 5.3% of GDP,1 and may be allowed more time to complete her deficit reduction programme.2 Ireland has been authorized to partially divert the proceeds of privatisations from debt repayment to supporting growth.3 We shall doubtless need more such retunings. Yet, without renewed growth, these will not suffice.

Routes to growth

The other big question of the moment is, of course, how can we find our way back to growth? The classic Keynesian method is of little use at present; it is based on big new government borrowings to fund big new projects. Out of the question during a crisis rooted in excessive government debts.

However, there are other possibilities. For example, project finance can be provided by the European Investment Bank (EIB), which is owned by the governments of the 27 European Union member states; it is rated AAA and able to raise capital on very good terms.4 Currently, on ten-year bonds in euros, it can borrow at less than 3%. The Bank’s priorities include transport and environmental projects, renewable energy and capital for small and medium-sized companies.

In the Bank’s annual report for 2011 we read that as the sovereign debt crisis developed, the EIB gave specific support to countries and regions that face limited access to capital markets…for the years ahead, the EIB’s strategy will focus on growth and jobs, economic cohesion and climate action.5

In 2011, the bank disbursed 55 billion euros in loans within the European Union. This was well below the record level of more than 70 billion in 2009, when lending activity was boosted to offset the effects of the 2008 banking crisis. Another major boost over the next few years would help to kick-start renewed growth in Europe; this idea seems to have the approval of the French and German governments. EIB vice-president Philippe de Fontaine Vive has stated that a €10 billion increase in the Bank's capital, which is under consideration, would make possible €60 billion in additional lending.6

Cash-rich businesses

One bright feature of the present murky scene is that, although governments are short of money and overindebted, many large businesses have abundant cash. They are reluctant to spend or invest it, because prospects seem so uncertain. This is a problem that arises in every recession. No-one wants to spend because no-one else is spending, and therefore economic prospects are flat or negative. But if everyone agreed to spend more, then growth would reappear and the outlook would become positive; the anti-spending argument would evaporate.

For everyone (or, at least, for many large companies) to agree to ramp up their spending, requires a spirit of co-operation, difficult to achieve in a world where we are gripped by the dogma of universal competition. For that dogma means that every business should make its decisions independently, avoiding any kind of co-operation with competing firms, pejoratively called collusion to make those who attempt it feel guilty, and often punishable by heavy fines.

But in the real world, outside the economists’ ivory towers, there is a need for central planning and co-ordination: a European growth plan extending to several years, agreed between firms, approved and overseen by governments. If that turns the free-marketeers livid with rage, it’s their problem. The aim must be get leading businesses to agree that they are all, insofar as they have the capacity, going to invest in substantial, carefully-chosen projects. The consequent spending will revive our economies and thus justify the investments. Businesses, not cash-strapped governments, will have to do the capital spending that Keynes, in different circumstances, called upon governments to do. In a deep recession, leaving this job to the markets will not work.       

Investing in a greener future

A major growth possibility is the development of ‘green energy’. Electricity from renewable sources (chiefly solar and wind power) has, so far, generally been more costly than power generated by burning coal, oil or gas. However, this problem is fading away as technologies improve. Photovoltaic electricity (from solar cells) is coming close to being competitive with [conventional] retail power prices in favorable markets, while onshore wind power is competitive with newly-built conventional plant under favorable conditions.7 Quite apart from the growth-stimulating merits of renewable energy projects, our need to cut back carbon emissions is pressing.  

So electricity companies should agree, as part of the planning-for-growth process, to install more solar and wind generating plant on a big scale. Most European countries are far behind the leaders Germany and Spain in wind power. In March 2012, Spain’s 19,400 wind turbines generated 21% of the country’s electricity;8 in April they did even better.9 Spain's solar installations have also grown rapidly, but they still contribute much less than wind; and reactions to the banking crisis have so far had the perverse effect of slowing down this very promising sector.

Attacking inequality could boost growth

Lastly, there is another way in which growth can be stimulated without enlarging state deficits. That is redistribution, especially topical in France at present because our new president François Hollande has proposed an income tax of 75% on the top slice of personal incomes in excess of a million euros a year. In our still largely Thatcherite world, that sounds outrageous; yet I can well remember when the top marginal rate in Britain was 98%; and even, briefly, more than 100%!

Believe it or not, even Americans lived with similar arrangements for many years.10 They had a top rate of Federal income tax as high as 94% at the end of World War II; this was on income in excess of $200,000 a year, equivalent to about $2 million today. The top rate remained above 90% until 1963. These punitive rates did not destroy American capitalism. They merely kept top salaries down to ample, rather than preposterous, levels. In fact, hardly anyone paid the top rate; salaries stopped short of the level that would have triggered it.

What has this to do with growth? The link is very simple. People with very large incomes tend not to spend all they get; they generally accumulate. With higher tax rates on top incomes, balanced by lower rates on small incomes, we could use the tax system to divert revenue from the very rich to the hard-pressed poorer classes. This money would no longer be accumulated, it would be spent. So we would have spending growth without additional net costs to state budgets.

However, here again there is a need for international cooperation. Hollande’s 75% is not feasible in practice unless other countries move in the same direction; it would simply encourage the most affluent French to move to London or Geneva or New York, where they would pay no French tax!

We must recover our confidence

Apart from sound business strategies, appropriate state policies and tax reforms, another factor is necessary: that is, confidence. So long as we remain soaked in a miasma of pessimism, we cannot make progress. It is confidence that makes growth possible; but in today's conditions, confidence is hard to find.

And yet, let us remember, only a few years ago, in many places, there was too much confidence! That was indeed one of the causes of our present troubles: banks lent far too freely on property developments, confident that these would be profitable. Now, from overconfidence we have fallen into excessive pessimism. As I write this piece, the French stock market is languishing at levels 20% below those achieved in March. Is business really 20% worse than it was a couple of months ago?

Not at all. We are simply 20% less confident. It is a question of sentiment rather than fact. Pessimism, like optimism, feeds on itself and all too easily becomes exaggerated. In a bull market, nobody reads the bad news; in a bear market, nobody reads the good news. You may retort that there is at present a real risk of breakdown in, for example, the Spanish government's finances. But if such an event were to happen, it would be the result of a rupture of confidence in Spain, possibly no better justified than the overconfidence of the Spanish bankers a few years ago.

Which is the more damaging, too much confidence or too little? A happy mean is what we need.

In the real world, banks shipwrecked by their overconfidence, arrogance, negligence and greed are in convalescence, recovering little by little. The British, American and French governments are borrowing at rates far below those of recent years; thus, old borrowings are being replaced by new lower-cost bonds, helping to curb budget deficits.

As for the theory of the 'efficient market' that supposedly knows everything and rationally takes account of all that knowledge, that is hardly more realistic that the flat-earth theory.

A prerequisite of a better future is that we clear our heads of that insufferable nonsense.

Spero columnist Angus Sibley is an analyst based in Paris. He is the author of The 'poisoned spring' of economic libertarianism' See his website here.

* * * References

1 Victor Mallet and Peter Spiegel, Financial Times (London), 13th March 2012.

2 Philippe Ricard, Le Monde (Paris), 10th May 2012.

3 Reuters, Le Monde (Paris), 28th April 2012.
4 The EIB is not formally guaranteed by the governments of the 27, but the shareholding states have a committment to provide further capital if required.

5 European Investment Bank, Activity Report 2011, page 6.

6 Agence France Presse, 29 May 2012.

7 International Energy Agency, Renewable Energy: markets and prospects by technology (2011), pages 36 and 49.

8 Gaëlle Lucas, La Tribune (Paris), 1st April 2012.

9  Le Monde (Paris), 3rd May 2012.

10  See my essay Thomas Piketty, expert on inequality in this series, June 2011.



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