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Evariste Lefeuvre
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Chief Economist for Natixis North America and Global Head of Cross Asset Research Expertise in international management. Currently oversee a team of 15 strategists based in New York, Paris and London. The team provides high quality global macro research on a wide array of products. Specialized... More
My blog:
The economy, Stupid!
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La Renaissance Americaine
  • Why A European Marshall Plan Won't Work 3 comments
    Apr 30, 2012 4:42 PM

    The idea that there could be any "expansionary fiscal consolidation" in Europe is non longer relevant. But the odds for a genuine fiscal stimulus remain very low.

    One of the consequences of a (possible) change in the current political landscape in Europe would be a switch from self-defeating austerity policies towards growth oriented measures. From a renegotiation of the fiscal compact to a "complementary" spending program by the EU, much has been discussed, but there has not been a concrete proposal yet.

    One of the reasons why such a debate matters is that the Eurozone crisis is not so much a fiscal crisis as an external account crisis. Tighter fiscal policies can dampen private domestic demand to a point where:

    1. fiscal revenues collapse;

    2. the current account deficit remains wide, as exports' responsiveness remains low due to structural supply impediments.

    This weekend was all about the €200 billion "Marshall" Plan for Europe designed by the European Commission. It would aim at investing in infrastructures and green technologies, using and leveraging funds from the EIB (European Investment Bank). This is not fiscal policy or fiscal stimulus per se, as domestic government spending and tax policies would not be affected. In addition it could not be considered a federal program as funds would not be drawn or channeled through the European Union structural funds.

    €200 billion makes up 2.1% of the Eurozone GDP. One-off spending should have to be spread out for several years, as was the case for the original Marshall Plan. This plan amounted to $13 billion during the period between 1948 and 1951: 1.1% of US GDP for the four years. Using Maddison data (see table below), it represented roughly 1.5% of the GDP of Western Europe recipients.

    €200 billion today, spread out over 4 years would amount roughly to the equivalent one third of the Marshall Plan.

    In addition, the Marshall plan was not a genuine fiscal stimulus. According to a 1991 NBER paper by Delong and Eichengreen (THEMARSHALLPLAN: HISTORY'SMOSTSUCCESSFULSTRUCTURALADJUSTMENTPROGRAM):

    Euro zone Marshall plan not substitute for a genuine proactive fiscal policy. would it not substitute for the economic federalism that has been advocated by many economist. But it would mostly focus on structural reforms that would probably not have a strong multiplier impact in the short run. This remains within the boundaries of Germain thinking as recent interview of Angela Merkel by the Leipziger Volkszeitung shows.

    So no additional growth impulses?

    Our policy to overcome the debt crisis is based on two pillars: first, on a sound financial policy, without which there will be no relief from the debt crisis, which alone is not enough. …/… . New government stimulus programs would not help Europe. What we need are structural reforms. We must remove the barriers to a healthy economic development. In Germany we have yet experienced for themselves how effective sweeping labor market reforms are for real, sustainable growth. I can also imagine that we strengthen the ability of the European Investment Bank yet.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: economy
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Comments (3)
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  • jossbolton
    , contributor
    Comments (31) | Send Message
     
    Evariste, I am struggling to understand why you think the proposed spending won't work - not that I disagree with your conclusion. Do you think the failure will arise because it is too small, is it because the on-going austerity measures will out-weigh the stimulus, or is it because it is not government-driven?

     

    I think plans to invest in new areas of economic activity are worthy, although I worry that if these areas are chosen arbitrarily by "bureaucrats", that investment will not be self-sustaining - as we are seeing with the solar panel industry; once government subsidies are removed, the underlying economic case just is not there on the scale the subsidies managed to achieve.

     

    We have seen, through the whole process of the Eurozone crisis, announcements of new policy moves which seemed designed to shore-up confidence, not change the economic landscape. I fear the EIB idea is just one such, with little practical basis.
    1 May 2012, 06:47 AM Reply Like
  • Evariste Lefeuvre
    , contributor
    Comments (45) | Send Message
     
    Author’s reply » Joss (if I may call you that way). THanks for your comment. I am a strong europhile and my point in this was to say that once agaion we have measures that are not really able to tackle the big issue here.
    This kind of spending would be part of the ex 2000 agenda, that is improving infrastructures and green businesses. If you travel in Europe (France Spain etc..), infrastructures are in a very good shape thanks to years of structural funds money.
    My view here is that if you want to carry out something that looks like fiscal stimulus you need at least political coordination or (i dream here) federalism.
    Dont take my piece as a eurobashing view point but more as a diseappointed europhile.
    1 May 2012, 08:46 AM Reply Like
  • jossbolton
    , contributor
    Comments (31) | Send Message
     
    I hear you Evariste; still, as someone who happily motorcycled on fantastic new roads in Spain in 1996, with the only other traffic seen being two motorcycle cops (also speeding and having a whale of a time on empty roads), the question "If you build it, will they come?" is uppermost in my mind. I always think of the increasing desperation of the Japanese, seeking to come up with new projects to stimulate the economy, and then building a $4bn bridge to an island with about 4,000 inhabitants - over 10 years ago!

     

    I still think the way out of this is to let the entrepreneurial spirit free, which means cutting red tape, probably cutting taxes on corporations, and freeing up labour laws. Unfortunately, as we see in France, politically this is very unpopular, and the idea of infrastructure spending is seen as an attractive alternative. I just hope it is not a bridge to a barely-inhabited island!

     

    All the best

     

    Joss
    3 May 2012, 05:48 AM Reply Like
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