The 750 billion euro ($833 billion) stimulus plan announced by the European Commission has been greeted by many macroeconomic analysts and investment banks with euphoria. However, we must be cautious.
Why? Many would argue that a swift and decisive response to the crisis with an injection of liquidity that avoids a financial collapse and a strong fiscal impulse that cements the recovery are overwhelmingly positive measures. History and experience tell us that, indeed, the risk of disappointment regarding the positive impact on the real economy is not small.
The history of stimulus plans in the eurozone should alert us against excessive optimism.
However, 4.5 million jobs were destroyed and the deficit almost doubled while the economy stagnated. This was after the balance sheet of the European Central Bank (ECB) had doubled between 2001 and 2008. Not only did that enormous plan not help the eurozone emerge from the crisis stronger, but also it can be debated whether it prolonged it, as by 2019 there were still signs of weakness. The tax rises and obstacles to private activity that accompanied this large package of expenses delayed the recovery, which in any case was slower than comparable economies.
We must also dismantle the idea that the ECB didn’t support the economy in the 2008 crisis. There were two huge sovereign bond buyback programs while Jean-Claude Trichet was president of the ECB, rates were cut from 4.25 percent to 1 percent since 2008, and there were purchases of more than 115 billion euros ($128 billion) in sovereign bonds. At the end of 2011, the ECB was the largest holder of Spanish debt, while it was accused of inaction.
During all this time, the balance of the ECB was greater than that of the Federal Reserve with respect to GDP, and in May 2020 it stands at 44 percent of GDP compared to 30 percent in the United States.
Stimuli have never stopped in the eurozone. An additional ECB buyback plan in addition to the TLTRO liquidity programs under Mario Draghi brought sovereign bonds to the lowest yields in history and led to the ECB buying almost 20 percent of the total debt of the main states. This was such an excessive balance sheet expansion plan that, at the end of May 2020, excess liquidity in the ECB was 2.1 trillion euros ($2.3 trillion). Excess liquidity was barely 125 billion euros ($139 billion) when the so-called 2014 stimulus plan was launched.
No one can deny that the impact on growth, productivity, and employment of these enormous plans has been more than disappointing.
Except for a brief period of euphoria in 2017, downward revisions to eurozone growth have been constant, culminating in the fourth quarter of 2019 with France and Italy in stagnation, Germany on the brink of recession, and a significant slowdown in Spain. The use of the excuses of Brexit and the trade war didn’t disguise that the economic result of the stimulus was already more than poor.
We have another important example of the need for caution. The so-called “Juncker Plan” or “Investment Plan for Europe,” considered to be the solution to the lack of growth of the European Union, also had an extremely poor result. It mobilized 360 billion euros ($400 billion), many for projects with no real economic return or real effect on growth. Estimates of growth in the eurozone fell sharply, productivity growth stagnated, and industrial production fell in December 2019 to its lowest level in years.
We must also be cautious with the green plans. All of us are in favor of a serious and competitive energy transition, but we can’t forget that an important part of the European Union’s “green” plan attacks demand via tax increases and protectionist measures, such as a border tax on countries that haven’t signed the Paris Agreement (but not on those who don’t comply; those have no risk). This limits the potential for recovery and increases the possibility of an additional trade war.
We can’t ignore the negative impact on industry and employment of the massive “green” policy plans of the euro area of 2004–2018, which caused European Union country households to suffer bills for electricity and natural gas that were twice those in the United States, while growth stalled.
What is the problem with European stimulus plans compared to those of the United States? The first and most important problem is that they come from directed economy central planning. These are plans with a strong component of political decision-making about where and how the money is invested. Political planning is an essential part of the largest parts of these stimuli, and as such, they generate poor growth and weak results.
Thus, one of the big problems is that sectors that are already suffering from overcapacity are being “stimulated,” or a false demand signal is generated via subsidies, which then generates working capital problems and an alarming increase in the number of zombie companies. According to the Bank of International Settlements, the number of zombie companies in Europe has exploded amid stimulus plans. The past is bailed out and the economy is zombified.
Another big problem is that the wrong sectors are stimulated while thousands of small companies that have no access to credit or political favor die. It’s no coincidence that the eurozone destroys more innovative companies or prevents them from growing when regulation forces 80 percent of the real economy to be financed through the banking channel, while in the United States it doesn’t reach 30 percent. Can you imagine a company like Apple or Netflix growing via bank loans? Impossible.
Another big problem is the obsession with redistribution. By fiscally penalizing merit and success and sustaining public spending above 40 percent of GDP at any cost with higher taxes while subsidizing low-productivity sectors, the European Union incurs a huge malinvestment risk when it rewards the subsidized sectors, or those close to political power, while those with high productivity are penalized. It’s no coincidence that Europe doesn’t have technological champions. It scares them off by perpetuating the obsolete national champions and penalizing merit remuneration and alternative investment via taxation.
Nothing we just discussed changes in the newly announced plan package. It’s the same, but much larger. And we can’t believe that this time will be different. While they tell us about green plans, the vast majority of the bailouts will go to aluminum and steel, autos, airlines, and refineries. Meanwhile, a huge tax increase in savings and investment may further drown start-ups, investment in research and development, and innovative companies.
The problem of the European Union has never been a lack of stimulus, but rather an excess of it. The European Union has chained one state stimulus plan after another since its inception. This crisis needed a strong boost to merit, innovation, private capital, and entrepreneurship with supply measures. I’m afraid that, again, it has been decided to rescue everything from the past and let the future die.
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