Tuesday, 16 May 2017

Macron(omics) missing piece - a private sector-based Eurozone transfer union: the core-periphery FDI bridge

The Eurozone suffers from a structural economic problem. An imbalance: a centre traditionally running current account surpluses, a periphery traditionally running current account deficits. Admittedly, the peripheral countries' current accounts are now balanced but as unemployment keeps falling it is difficult to see how this won't translate into a rise in imports and current account deficits resurfacing again. The classic response to address such imbalances is via the creation of an EU transfer union. In theory, it would make sense.

But theory is not always very practical: it is almost impossible to gain political support at the EZ's national level to transfer taxpayers money from the centre to the periphery. However, doing nothing is not an option either. And this begs the question: what to do? The answer: create a centre-periphery FDI bridge. The idea's rational being reasonably straightforward:

Problem: Peripheral countries (Spain, Portugal, Greece) have traditionally (i.e. since WWII) run current account deficits - the resulting accumulation of foreign debt leading sooner or later to an inevitable “sudden stop”, financial and economic crisis. Just like in 2009/2010. 

Solution: These countries need to broaden substantially their export base and implement an export-driven growth strategy. The way to do it in an effective and reasonably timely manner (5-10 years) is by attracting massive amounts of foreign direct investment (FDI): that the Siemens, L'Oréals, Googles of the world set up production/service units in the countries (or expand the already existing ones) to serve (mostly) clients abroad. For it to happen structural reforms at the national level are needed – no doubt. But it will not be enough. The European Union has to create a mechanism that incentivises the flow of private capital (simply said “Germany’s excess savings”) from the centre to the periphery to finance the FDI projects. This should comprise:

- tax incentives, e.g. FDI projects not paying corporate tax for the first 10 years;

- a pan-EZ legal & institutional framework, e.g. FDI courts at EU level investors could resort to in case of legal issues arising with their projects. Thus overcoming the potential lack of trust in the national legal frameworks & judicial systems.

In short: create special economic zones in the EU periphery offering investors a highly attractive and reliable fiscal, legal and financial return framework

Result: A win-win situation - the periphery expands its export base and generates strong export-based sustainable growth; the centre can invest its surplus in economically sustainable projects at an attractive rate of return (instead of investing in US-subprime or Spanish overvalued, excessively supplied, real estate assets as in the pre-2008 period). 

Cutting a long story short, the centre-periphery FDI bridge is an incentive mechanisms at the EZ level to channel private sector monies from the surplus centre to the deficit periphery, to finance FDI projects in the latter. It is both politically more feasible and economically more efficient / sustainable than creating a classic transfer union.

Combined with (i) a limited common EZ budget (managed by an EZ finance minister) to finance investment projects across the EZ, (ii) evolving the ESM into a fully-fledged European Monetary Fund for crisis resolution situations, (iii) full implementation of bank bail-in mechanisms and completion of EZ's banking union, the FDI core-periphery bridge would complete Eurozone's required institutional framework and make it a sustainable and prosperous economic construct. The Euro would definitely become a success story.

Emmanuel, are you reading? Thanks to you, we - the Erasmus generation - are in charge now. Let's make Europe great. Again.

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