Massive Eurozone infrastructure deficit requires urgent redress

The latest – EIB Investment Report 2017/2018 – published last week by the European Investment Bank tells anyone who cares to take those Europhile Rose Coloured Glasses off for just a second how deep the failure of the European policy making structures are and how long the negative impacts of those failures will resonate. This is the true ‘burden for our (their) grand kids’ sort of stuff. In claiming they had to run tight fiscal policy biased towards surpluses to avoid forcing the future generations to carry an unfair burden, these European policy makers and leaders have done exactly the opposite, as predicted – they have created an appalling future for their youth and their children to follow. The whole European monetary experiment is a failure and is beyond reform. It needs to be scrapped, national sovereignty restored and people within their own countries left, through democratic institutions to determine how the public sector operates in their best interests. The Troika technocrats should be led out to pasture. And, to the Europhile Left: take of your rose coloured glasses.

I have previously documented how infrastructure is falling apart in the Eurozone. I discussed a visit in 2015 to Porto and more recent experience in Germany, where fiscal surplus mania has meant that its trucks can no longer transit important bridges to other nations, which is undermining their export model.

There is now widespread infrastructure failings across Germany.

I have also discussed how the current European Commission President’s grand scheme to revitalise Europe – the so-called Juncker Plan or EU Infrastructure Investment Plan” – was so badly underfunded and implemented that little benefit has come from it.

Whereas massive capital injections are needed in the Eurozone after two decades of starved public investment the policy makers hand out pennies, so obsessed are they with fiscal austerity.

Please read my blog – The chickens are coming home to roost for Europe’s so-called powerhouse – for more discussion on this point.

Meanwhile the Europhile Left keep telling everyone that there is a reform process in place which will bear ‘progressive’ fruit and that people should be patient and see this process out.

Talk about head in the sand. Not only is the human capital (particularly the future adults) being seriously eroded by mass unemployment and welfare cuts, but it is also clear the physical (productive) capital in now in a dire condition.

Taken together the long-term costs of this period of economic lunancy – the Economic and Monetary Union – will be massive and damage prosperity for decades.

Major surgery not tinkering around the edges is needed. The Europhile Left is living in cloud cuckoo land if they think a reform process will deliver outcomes that promise higher net benefits in the long run than an exit and dissolution approach.

As I noted in the Introduction, even the European Investment Bank is now documenting the massinve failure in infrastructure provision due to the austerity obsession in the European Union.

To put the EIB Report in context, the following graph shows the change in the aggregate investment ratios from the June-quarter 2007 to the June-quarter 2017 for most Eurozone nations (and the EU28 and the EU19 taken as wholes).

Some nations (for example, Slovakia) do not have reliable comparable data to do this calculcation.

The investment ratio is the proportion of Gross Domestic Product accounted for by Gross Capital Formation and indicates how much of the current production each nation is allocating to expanding productive infrastructure.

Potential GDP and hence longer-term growth is driven by capital formation. A nation that is not investing in its future productive capacity will see declining productivity growth, falling standards of living and leave its grandchildren materially deprived.

The graph is stark. Only Ireland (through accounting shifts mainly), Malta, Belgium and Austria recorded increases.

Greece went from an enjoying investment ratio if 26.6 per cent in June 2017 (well above the EU28 and Euro19 averages) to a staggeringly low 9.5 per cent in June 2017.

That almost amounts to a decimation of its productive infrastructure and potential.

Spain went from 31.5 per cent to 20.7 per cent. Italy from 21.9 per cent to 17.1 per cent. Portugal from 22.5 per cent to 16.6 per cent. Latvia from 43.8 to 21.9, although this is still above the EU19 average of 20.8 per cent in June 2017.

There is a dual characteristic of investment spending. While investment adds to aggregate spending in the current period it also adds to the productive capacity of the economy. To fully utilise the growing productive capacity the economy must also experience appropriate aggregate spending growth.

This means that the income level that might be consistent with full employment of capital and labour in the current period will be deficient over time as the productive capacity grows via investment expenditure.

Thus, aggregate spending has to grow in the next period to ensure the extra capital is fully utilised. The expenditure side of the economy can be seen as always chasing the growth in capacity that it creates.

Starving the economy of investment expenditure reduces national income now but also reduces the future growth path.

The EIB Report suggests that investment expenditure has “reached an average of 3.2%, clearly exceeding the 1995-2005 average of 2.75%”.

Although, when I do the calculation in real terms (deflating for inflation), the difference between the periods is much lower (just 0.4 points per annum on average).

However, despite some recovery in investment spending overall, the EIB notes that they:

… see many areas in which investment is still being held back; on the other, we see long-term, structural challenges facing Europe that require an acceleration in far-sighted investment.

They note that:

The recovery is now turning a spotlight on structural investment needs: innovation, skills, infrastructure and sustainability. The EU continues to fall behind global peers in terms of R&D spending …

Significantly, the EIB says that “There is no recovery yet in infrastructure investment – undermining Europe’s long-term potential”:

Infrastructure investment appears to have stabilised at 1.8% of EU GDP, down from 2.2% in 2009. The decline is strongest in countries with the lowest infrastructure quality, pointing to a slow-down in the convergence process. The main driver of the slow-down has been fiscal policy choices that have been biased against long-term capital expenditure, while corporate infrastructure has also struggled to keep up with pre-crisis rates, in part due to regulatory pressure on allowed returns. Municipalities report a significant infrastructure gap and see fiscal constraints, rather than access to finance, as the main obstacle.

They also find that:

1. Nations have pursued “current account surpluses … at the expense of investment”.

2. “EU firms continue to be net savers overall, suggesting that many firms are unwilling to invest despite a liquid financial position”. This is, in part, due to an ongoing “deleveraging path” which helps “explain the modesty of the recovery, and bank lending to firms continues to stagnate”.

Which is unsurprising given that the crisis was a balance sheet recession. As I noted last week, a balance sheet recession requires the government to run elevated fiscal deficits for an extended period to allow the non-government sector time to restructure balance sheets via increased saving (lower spending than usual).

This is a slow process and requires years to decades of overall saving in the non-government sector to accumulate in debt reduction.

Support by on-going fiscal deficits is paramount. Exactly the opposite to the way the Eurozone Member States have been bullied into behaving.

Please read my blog – Balance sheet recessions and democracy – for more discussion on this point.

The EIB recommend (among other things) that:

• There is a need to re-prioritise public infrastructure investment …
• Enhancing the productivity and competitiveness of the EU economy requires attention to be paid to innovation, including investment in intangibles, particularly skills, as the EU is falling behind peer economies in this regard. Skills are an important priority, relevant across Europe, as is R&D spending, but policy should also target all types of intangibles.

Their analysis shows that:

1. “EU infrastructure investment is 20% below pre-crisis levels” – so the talk of higher average annual growth rates since 2013 must be understood in the context of the lower base after the collapse during the crisis.

The areas most impacted appear to be transport – roads, rail links, bridges etc and there are massive divergences spending across Member States on these essential infrastructure items.

While the poorer nations, such as Greece, Spain, Ireland etc have cut their infrastructure spending dramatically to give the impression that their public spending is falling within the Stability and Growth Pact fiscal rules, even nations such as Germany, has reduced essential infrastructure spending.

The EIB note, for example, that “Lack of access to digital infrastructure increased considerably in Germany” among the other nations since their last report.

A recent OECD Report (April 2017) – Towards a Better Globalisation: How Germany can respond to the Critics – concluded that “Germany lags behind the OECD average” on many digital infrastructure components (broadband, education, IT skills generally).

It says that “Public investment has been low and has declined markedly at the level of municipalities … which have reported large unmet investment needs in schools and other educational facilities … This is problematic in light of the important role that high-quality education plays for inclusive growth”.

And: “There is also a need for additional investment in Germany’s transport infrastructure and its digital infrastructure”.

So it is not just the poorer nations that are in infrastructure-deficit. Even the powerhouse of Europe is seriously degrading its future prosperity, while its government boasts about the fiscal surpluses it is running and bullies other nations into pursuing a similar strategy.

The EIB Report concluded that:

… the quality of available infrastructure in most EU countries has declined over the past decade. The decline is particularly relevant in Germany, Belgium, Cyprus and Sweden …. The quality of infrastructure declined in lockstep with investment (or lack thereof) in the sector … driven down primarily by the fall in government investment.

The EIB Report concluded that:

In 2016, general government investment in the European Union (EU) reached a 20-year low as a share of GDP … The level of government investment in the periphery and more generally in the euro area is particularly low when compared to pre-crisis and historical levels … low government investment will inevitably be detrimental to cohesion, competitiveness and growth potential … In 2016, government investment in Italy, Portugal, Ireland, Spain, Croatia, France and the Netherlands, was at its lowest (or close to lowest) point since 1995 …

2. “Firms 45% rate of their machinery and equipment as state of the art” – so the quality of the productive equipment is declining and the EU is clearly lagging in this area.

3. “34% of municipalities say infrastructure investment is below needs” – the austerity has damaged lower-levels of government which actually supply essetial services in many nations.

The EIB inform us that “About 50% of infrastructure investment in Europe happens at the sub-national level, where fiscal constraints and administrative capacity are the key problems”. The austerity obsession at the Member State level feeds down to the municipalities as the national government seek to cut fiscal deficits.

The point here is that infrastructure spending is, in a way, easier to cut politically, because the adverse consequences are less immediately noticable and start to impact beyond the political cycle the governments are engaged in.

It is hard to cut welfare payments to individuals who then end up on the street in mid-Winter without housing, food and adequate income.

It is much easier to defer maintenance on bridges as the traffic will keep flowing for years without the deterioration becoming, as it is now in many parts of Europe, dangerous.

The EIB say that “The decline in government investment was offset by increased current expenditure”, which assists in maintaining current growth but undermines future growth potential.

This point is clearly evident in the following graph (Figure 7 from the EIB Report).

Conclusion

I have been compiling evidence in recent blogs to support the contention in our new book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017) – that the Eurozone should be broken up and currency sovereignty restored to the Member States.

As I explained in my previous book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (Elgar, 2015) – breakup is just the first step.

Abandonment of the neoliberal obsession with fiscal rectitude (unless it is lining the pockets of the top-end-of-town) is the other necessity.

But overcoming neoliberalism will not be sufficient for the Eurozone Member States. They also have to be able to use their own currencies to advance well-being.

The damaging infrastructure deficit in Europe as a result of the fiscal madness the policy makers have imposed will resonate for years to come. It needs urgent redress.

This is in addition to the catastrophic youth unemployment situation.

Yet the Europhile Left are content with a slow-moving reform process that has no guaranteed outcomes which will grind away producing a series of compromises that avoid the main issues – as is the norm for the modern day (dysfunctional) European Union.

It is well past the time they should have taken off their rose coloured glasses

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.