The Juncker Plan, Draghi’s QE and next steps in a Europewide Experiment
We need structural reforms to modernise and preserve our social market economy. We need fiscal responsibility to restore confidence and the sustainability of our public finances. And to complete this virtuous omne trium perfectum (rule of three; or “everything that comes in threes is perfect”) we now need to boost investment. No tree can grow on soil and air alone, the Investment Plan we are presenting today is the watering can.
-Jean-Claude Juncker, President of the European Commission, addressing European Parliament, 26 November 2014, Strasbourg, France
It was an ambitious speech. Not just due to its visually rich list of scenes of investment success. Rather, it was a vision offered to the European Parliament that would be based almost entirely upon private money.
European Parliament. Private money. So how would those two go together?
If the role of the private sector is to invest, then the role of the government is to get the context for that investment right. To enable rule and reform that wouldn't just welcome the new vision — it would have to show it respect, and get out of its way.
The not even lukewarm reviews and the criticism (and more criticism) began almost immediately. The President of the European Commission is actually saying that a small seed, that is seed funding, can grow into a tree? Wasn’t that the sort of thing we’d hoped on before the last financial crisis? Quite soon before it?
Where is this money going to come from, anyway? And why such a levered sort of setup?
At times, they sounded a bit like skeptics staring at a new Silicon Valley startup. One which might lose them a lot of money. Or might be the dazzling one that got away.
This investment plan does illustrate a certain willingness from the European Union to encourage investment. But we must keep in mind that these 315 billion euros contain very little public money. This plan may be a good sign for investment within the European Union, but I honestly think it could have been more ambitious.
For those who have nearly or entirely lost confidence in anything but a government’s ability to generate demand, the mere idea of hope in the private sector as collaborator, risk taker and carrier of an effort to the finish line was almost too much to imagine. Some even thought it a scheme, a vision that gave those up top the role of suprasovereign philosopher kings as individual states became their beasts of burden and debt.
But more debt — of the types sovereigns both wanted and feared — was not what Juncker was proposing. Whether or not one buys the idea of seed investment as a promising (and yes, risk-prone) beginning, they also confronted the larger idea of what Juncker was suggesting.
He was suggesting that Europe view this plan as one. Supranationally.
[…] geographical silos will not serve anyone. France growing is good for Italy. Southern Europe growing is good for Germany. We are all in this together. Our fates are linked. We should stand shoulder to shoulder.
He’s not alone. European Central bank President Mario Draghi weaves his own vision of suprasovereign necessity into almost every speech he gives.
A vision of European states being better together than apart. Sharing a future. A future that still has choices.
If I could name my top surprise from European Central Bank President Draghi’s press conference following the meeting of the Governing Council of the European Central Bank on 22 January, it would be the lack of time spent by reporters on the Juncker plan announcement, and how it might now be shaped by the large scale asset purchases that Draghi announced.
While Juncker’s words drew mentions at Draghi’s 4 December 2014 press conference, such mentions tended to focus upon the vast amount of thoughtleap demanded between actual pledges/guarantees and the €315 billion size of the plan. One which, watering can in hand, would grow trees from seeds (that is, spur capital investment) of many times its original size.
Member States should join in and multiply the impact of the Fund even further. Every public Euro mobilised in the Fund can generate about €15 of investment.
Reporter Johanna Treeck of MNI asked Draghi if he thought such words were credible. Far from inappropriate, her question was representative of the skepticism that many informed observers were whispering amongst each other at that time.
Draghi responded. Without specifics, but with evident, even confident support in what Juncker had suggested.
With Draghi’s blessing, and new QE to back that up, do we now have more reason to take Juncker’s plan outline seriously? Do those who were at first skeptical now see that their own doubts might be contributing to a self-fulfilling European stagnation, to an inability to imagine and invest largely? How much can economic growth actually depend upon signaling of credible and confident visions like the one Juncker shared?
Draghi’s QE announcement on January 22nd brings us the same questions. About signalling and its effects. I was surprised not to hear about Juncker precisely because Draghi’s QE (to commence March 2015) and the Juncker plan (to commence June 2015) are both in better position having been announced concurrently.
They promise to support each other’s possibilities. They are better with each other than they would be existing apart. As Juncker said,
What we are going to do is to set up the right system that will use available public money to leverage additional capital that would have never otherwise been mobilised. Every public euro mobilised can generate additional investment that would not have happened otherwise. And it can create jobs.
The Juncker plan, as vague as it still is within its earliest legislative phases, may eventually be a component of realizing the vision of a single money to which Draghi is so deeply committed. It may be one way that QE, the widely anticipated but still almost dazzling announcement of of last Thursday’s ECB meeting with the press, can transmit to the real economy instead of remaining in the SIFI/banking tier. To enrich those already enriched, as certain phases of QE have been known to do in their stateside-version iterations.
Sometimes I joke (in a friendly way) that Draghi and Juncker are “interactive poets” in a sort of contest. Putting glorious words to the European Experiment.
What do I mean when I say the Experiment?
It’s a term that can cover many things, depending upon the speaker. In my case, I speak officially of the euro itself, and of the trade and banking unions that a single money implies.
I do so in a calm and professional tone of voice that is well suited to elite business meetings.
Yet I also speak of a vision, one associated with both Draghi and Juncker, of a greater oneness of Europe. My voice for this aspect is one of fascination, trepidation, and a bit of wonder.
I can’t tell you whether I think it’s good or bad. I don’t know the answer to that yet. I can tell you that it captures my attention. As one who researches the evolving role of global central banks in an era of normalization, I think about it every day.
Draghi, in announcing QE, and Juncker, in his earlier outline of an investment vision for Europe, speak to two integrated aspects of how this experiment will soon unfold.
Knowing that the promise of monetary action is only fulfilled to the extent that confidence in the credibility of such action is both widespread and able to influence economic (read, investment) behavior, Draghi acknowledged this past Thursday that QE — even at the forcefully ambitious €1T+ levels proposed — could not work alone. It would have to invite fiscal and structural policymakers to join monetary policymakers in creative, innovative and outcome-aligned combination.
One alone would not suffice. It would have to be all of them.
His words about policy were also about Europe. He seemed to recall Juncker’s words, of a plan without forcefully imposed limits:
The €315 billion of total expected investment is not a ceiling. If we are successful, as I believe we will be, we can even go beyond this.
Draghi’s own words are specific, but soon become open ended; the look to a future target, one that is possible but ultimately vague to target.
(The Governing Council) )decided to launch an expanded asset purchase programme, encompassing the existing purchase programmes for asset-backed securities and covered bonds. Under this expanded programme, the combined monthly purchases of public and private sector securities will amount to €60 billion. They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation…
Draghi takes care to mention that the new addition of QE comes atop previous efforts already in progress, though he takes care to add sweeteners.
…the Governing Council decided to change the pricing of the six remaining targeted longer-term refinancing operations (TLTROs). Accordingly ,the interest rate applicable to future TLTRO operations will be equal to the rate on the Eurosystem’s main refinancing operations prevailing at the time when each TLTRO is conducted, thereby removing the 10 basis point spread over the MRO rate that applied to the first two TLTROs.
Juncker also takes care to emphasize that his proposal represents an addition:
Let me clear about one thing — the money we are putting forward today comes on top of what already exists
Both communicate improvement and continuity, and neither acknowledges any fault or failure within admitting that earlier and lighter efforts had not yet shown themselves effective. Yet neither doubles down.
In each case, the picture changes. This is a nuance that some grasped, and others may have not.
Entering unmapped territory inevitably brings concerns.
Like Juncker, Draghi received some challenging questions. (1) I’ll highlight two here, which came from reporters representing ANSA and Berliner Zeitung. Both had to do with the perception of the QE launch by states. Would the inflow of cash resulting from the purchases create fiscal easing for states?
The latter reporter, mentioning Draghi’s speech at the 2014 Jackson Hole gathering, linked the perception of recent economic growth to the presence of a backstop. As I note in my other post mentioned, such questions are “hot potatoes.” To answer “yes” removes reality from the operations of the market. In a sense this is what the post 2008 (global) and 2011 (Europe) crisis responses were about. Suspension of reality in the market mechanism. Such actions when temporary, can be reparative in nature. But they are not intended as solutions in themselves, and both Draghi and Juncker use their speaking opportunities to confirm this.
Draghi told two questioners in remarkably certain terms that the liquidity generated via QE was not to give fiscal room to states. It was for lending to the real economy.
Draghi, to ANSA:
The answer…is absolutely no. As I just said, it would be a big mistake if countries were to consider that the presence of this programme might be an incentive to fiscal expansion. They would undermine the confidence, so it’s not directed to monetary financing at all. Actually, it’s been designed as to avoid any monetary financing.
“Absolutely no” is a clear answer.
Juncker’s emphasis on the role of nations as enablers of private investment, not takers of more favors, is no less strong:
Let me, however, be very clear: we need political endorsement and backing (from the European Parliament), but not politicisation of the Plan. No political fiddling with projects, no national wish-lists. This is a major credibility test that has to be convincing to private investors and the world financial markets.
Juncker emphasizes a point often made by Draghi. This isn’t about individual countries and their unique desires. It’s about Europe. Europe as one, with one shared goal.
We will need to look carefully at projects. Destinations for the fresh investment drive should be attractive, free of regulatory burdens and linked to economic reality, not political expedience.
Considering the venue, this statement by Juncker was both brave and unpopular. He did not shy away from it:
The Plan is not an ATM and the Fund will not be a bank. We need something agile…Something that can evolve and develop over time. Not constrained by the “silo” logic of thematic, sectoral or geographic pre-allocations. Something credible that builds on established structures and guarantees accountability.
Juncker’s note of building upon established structures seems to echo Draghi’s repeated note that QE adds to, and does not dilute, efforts already in progress.
Not wanting to appear to be challenging the methods, rules or importance of existing European structural funds, the European Commission was proactive in its communication. But questions remain.
A EurActiv piece titled Juncker Plan May Bring Unintended Consequences For Regional Policy (23 January 2015) notes
The European Commission published an explanatory document, where it proposed ways in which the two investment schemes may be made to work effectively side by side. It explains that member states can use European structural funds to invest in the projects financed by the investment plan.
In a gesture of support for regional authorities, the European Commission launched an information service on 19 January, in partnership with the European Investment Bank. The service, called fi-compass, is designed to offer guidance to European regions that hope to carry out projects under the framework of the Juncker plan, allowing them to circumvent the centralised systems of the member states and take their projects straight to EU level.
Pay close attention to the last sentence. Europe is quite accustomed to performing overt (or merely suggestive) fiscal transference via national budgets. This clearly has complicated efforts to smooth impacts of creditor nation policies on debtor nations, a topic I’ll pick up in near future posts around the very recent Greek election.
Yet Juncker takes care to provide a way that projects can go over the heads of their very own countries.
Such effect may go in the other direction as well. Note Draghi’s QE announcement, and its clever sleight of hand:
As regards the additional asset purchases, the Governing Council retains control over all the design features of the programme and the ECB will coordinate the purchases, thereby safeguarding the singleness of the Eurosystem’s monetary policy. The Eurosystem will make use of decentralised implementation to mobilise its resources.
Draghi rounded out his Europewide point in his opening statement, ensuring that the Governing Council’s oversight would direct actions taken at the national bank level. It’s a consensus that enables political messaging in creditor countries to emphasize lower risk and greater perceived authority/action at the national level, while retaining most if not all of the spillover effects that would be achieved by a Europewide effort. Draghi the politician emerges alongside Draghi the economist in such moments, reminding us that central bank leaders must also be experts in the field of multi-stakeholder consensus in an era when their direction over regional growth initiatives is growing more necessary and dominant.
To this point, I’ve recently written and spoken on forward guidance and the forms it can take, emphasizing the role of context over forecast as a preferred model for guidance.
While forecasting is somewhat self-explanatory, e.g. we expect to be at point n by timeframe x, data allowing, a context based forward guidance makes no such vague promises. It focuses on creating an architecture which is suggestive of future policy moves and situations. Draghi is well known for such a style, and Juncker echoes it as well in describing the framework for his investment vision.
Money will not fall from the sky... We will have to attract money and make it work for us. Today we are setting up a new architecture that will make this possible.
The key is to provide a risk-bearing capacity that can unlock additional investment.
Juncker also adds,
The answer is not just financial. It is also regulatory. A single EU Regulation can replace 28 sets of laws. This is the best simplification machine.
Like Draghi, he creates a Europewide, more than just money sort of context. He makes the point that the reliability and capacity of states to take advantage of this program as a tool for economic growth rests in their ability to support supranational institutions and implementation.
A vision that is Europewide.
Juncker announces that his plan is elevated by the very location of its proclamation, saying,
And I am presenting it in the Parliament, because that is where important things should happen.
Two months have passed since Juncker’s words of optimism. What have we seen? It’s not yet looking like the omne trium perfectum made whole.
Rather, it’s projects, and more projects. Via EUInside:
From the review of the filed projects it becomes clear that every member state is pulling the rig toward itself.
This was to be expected. For this reason, I wouldn’t have made this speech within a plenary session before European Parliament.
Put more candidly? This plan could go there to die.
While we hope in a modern sort of investment framework in which form follows function, institutions often behave differently. Function follows form, and original visions are twisted or lost.
My worry is that it will legislatively translate to a pile of boundaries. Enormous efforts and regulations to match that will naturally favor those that can play the legislative game — i.e. entrenched industries and interests.
Here in the states, we’ve seen this movie many times before, as glowing intentions and promises called “progressive” feed legislation that nurtures and solidifies a bifurcated status quo — one that absent such hulking “new” orders might have actually been open to incremental, nimble and ethical reform.
This is a structural problem inherent in most, if not all grandiose legislative solutions, but it’s not one that Europe has time for right now.
It’s a reason to consider that Draghi, as President of the ECB, may have considerably greater flexibility than Juncker, as President of the European Commission, within this interactive picture. I will be considering this idea in future writing.
Juncker’s address on 26 November 2014 in Strasbourg came just a day before Draghi’s already legendary address at the University of Helsinki, which I spoke of in a recent post, Pari Passu. Ultra Vires. Coming just after Juncker’s call for the omni trium perfectum , it is easy to see the two as interactive poets assigning inspired words (some of them Latin) to the European experiment.
Are both visions admirable, but idealistic? Yes.
The Juncker plan’s role as a seeding vehicle relies upon diverse projects and participation. Government is not the sole driver of the growth equation.
While states can start something, seed something or jolt something in a time of slowdown, the plan acknowledges — much as Draghi’s QE announcement did — that states should not be expected to carry it through if the goal is a functioning and rejuvenated economy for all of Europe.
In this context, the structural reform demands linked to Draghi’s QE announcement call for sovereigns to be part of a suprasovereign purpose.
The structure of each project is emerging. We’ll soon know if the Juncker plan will give far grander meaning to the recently announced QE, which by Draghi’s own admission cannot work on its own.