Vicky Pryce, author of Greekonomics: the Euro Crisis and why Politicians Don't Get It, on progress in the Eurozone.
An invitation by the European Commission to join a group of experts to advise on an industrial policy for Europe took me to Brussels earlier this week, on the day that The Economic and Financial Affairs Council (ECOFIN) was meeting. The good thing is that ECOFIN meeting seems to have progressed things a bit. A E120b growth pact was signed, which is itself good news, as lack of demand is at the heart of the problem in Europe – with it comes a lack of appetite to borrow and invest, accentuated by concerns about the soundness of banking systems and a flight of capital from many countries. Spain saw some serious outflows in recent weeks. So will the new growth compact make a difference? In reality it is a combination of a number of different elements: the extra E10b capital to the European Investment Bank, which the UK is also contributing to and which was agreed a few weeks ago, and which can be used to create a lot of extra lending by the EIB on infrastructure and for SME finance. Then, added to this, are structural funds that have been under-utilised, which will now have to be reprioritized and spent. And finally some 'project bonds', which will be issued and will go to special growth projects in the various countries.
Much will depend on the willingness and appetite to use these funds by the various countries or on investors' willingness to assume some of the risks associated with the 'project bonds'. And, of course, much will hang on the ability of the various countries to execute the projects in good time so they can have the desired stimulatory effect. Well, there are a lot of assumptions there. Moreover, given that a country like Greece has a poor track record of putting together and running successful projects, the likelihood of enough money being allocated to it or for it to actually start getting spending in the near future is very small.
Another development this week was in relation to Spain, which had seen its borrowing rates jump again after the temporary relief that was granted when the banking package was first announced some weeks ago. The June 28/29 summit which discussed it further seemed to suggest that in fact the lending would go directly to the banks rather than add to the deficit of the country i.e. via the government of Spain. It was hailed as a great success by the Spanish and Italian governments. But in fact the agreement seems to have been misunderstood by everyone – the markets and the participants alike! In the end the E30b allocated to Spain was still via the Spanish government, therefore, temporarily at least, increasing Spain's debt to GDP ratio. The direct injection that might then bring the debt down will not happen until supervisory powers for Eurozone banks have moved to the ECB. What is more, many of the details have still to be sorted out – will the ECB be supervising only the big banks or all the banks in the Eurozone; will it all be tantamount to a banking union, will there be eventually a joint deposit compensation fund in the case of a bank default across Europe, will that then cover all banks or just a few; and will there eventually be Eurobonds issues?
There is still a lot of confusion around. And for Spain what is clear is that there was conditionality attached – although the date for reducing the deficit to GDP ratio to 3% has now moved by a year, a lot was expected from Spain as a result. Prime Minister Rajoy duly announced an austerity budget on Wednesday the 11th which would take an extra E60b from the economy through tax increases and cuts in government spending, including salaries and benefits. The cuts in unemployment benefit in a country with the highest jobless rate in Europe will certainly hurt.
Protests are already starting and it will be interesting to see how things flare up in the months to come when these cuts really start to bite.
Vicky Pryce is a Greek born economist and former Joint Head of the UK Government Economic Service. Read Vicky's interview with the Evening Standard on why more women should be in top finance jobs here.