Growth pact for Europe

For years, the European Union has regularly discussed strategies for economic growth at its summit meetings. The EU's existing regional fund, totaling some 30 billion euros a year, is already designed to generate growth and jobs, says EU Commissioner for Regional Policy, Johannes Hahn.

Already in January of this year, a special EU summit asked the EU Commission in Brussels to draw up a package of measures. Under pressure from France's new socialist president Francois Hollande, the debate has gathered fresh momentum. Hollande made the issue a cornerstone of his election campaign in April.

Now, Hollande can present results, as he did with satisfaction in Rome a week ago. "We have agreed to a pact for growth based on one percent of the EU's gross domestic product. These funds are to be mobilized as quickly as possible in the current year," Hollande said after a meeting with German Chancellor Angela Merkel and the prime ministers of Italy and Spain. The growth pact was set to be officially unveiled at the EU summit in Brussels this Thursday.

Pact is only part of the puzzle

One percent of European Union GDP is 130 billion euros. But economic expert Yannis Emmanoulidis, of the Brussels-based Bruegel Institute, is skeptical whether this volume is sufficient to jumpstart the EU economy.

"It is one element; one element of the puzzle. But, of course, the crisis is not going to be overcome with it. The volume of this package is not big enough to ensure that things will actually change economically in the end," he told DW. Emmanoulidis, like other experts, criticizes that the 130 billion is not "fresh" money, but stems from the existing budget and subsidy funds of different EU institutions. "There are things in this package that represent old money. Relatively little new funding is being made available to promote growth measures," he said.

Merkel pressed to make concrete promises

What is new is the 10 billion euros allocated to the European Investment Bank as additional equity. The bank can leverage this capital to generate 60 billion euros in loans to be made available to small and medium-sized business.

According to Chancellor Merkel's office, she has signed off on the growth pact because she, of course, is also interested in seeing the economy pick up. It was not some invention of the French president, say German diplomats, or of the Social Democrat opposition in Germany.

"Growth and solid finances: those are two sides of the same coin," Merkel said at the four-way summit in Rome, rejecting the impression that she wanted to cut expenditure in Europe until there was nothing left. "Solid finances are a prerequisite, but they are not enough if no growth and no jobs come from them. That is our most urgent problem in Europe," the chancellor said.

Growth vs. cost-cutting - an old debate

Emmanoulidis thinks that the French president provided the decisive push to get the growth pact, but he did not invent it. The debate over whether austerity measures will push countries with shaky finances further and further into recession is older than that.

"I think that since about last summer we have had a bigger discussion about a better balance between austerity and growth," Emmanoulidis said. "It has taken a long time to get to a concrete growth pact, as it will now be called. In January and March there were EU summits dealing with the growth issue. Now, there are much more concrete things on the table than there were in January and March."

Lack of money is not the problem

Part of the growth pact includes up to 60 billion euros over the next two years of unused funding from EU subsidy programs. EU Commissioner Hahn however, warned in an interview with DW back in April that there was a lack of communication. The funds have not been used, but they are planned for specific projects.

The problem is not, in Hahn's view, that there is not enough money to promote projects, but rather that there are not enough projects to be promoted. For Greece, there is a long list of possible projects, but on average, it takes four years before a decision is made on a specific subsidy measure, he said.

'Project bonds' a tiny portion

The Pact for Growth presented as a big success at the EU summit also includes so-called "project bonds." These are joint bond issues of the eurozone states for specific infrastructure-related construction projects, such as roads, power lines, tunnels and such like. Project bonds are supposed to bring in fresh money. "However, this year there are only project bonds worth 230 million euro planned," criticizes Guy Verhofstadt, former Belgian prime minister and now head of the liberals in the European Parliament. "That is ridiculously little in a package of 130 billion," he said. The concrete implementation of projects and credit measures from the Pact for Growth will take many years, according to officials at the European Commission.

The pact is intended to kick-start investment, which, in turn, is supposed to generate jobs. It is not intended to provide incentives for more private consumption, such as Germany's "old-for new" car sales program in 2009. Furthermore, said Chancellor Merkel, it is clear that there "can be no more economic stimulus programs on credit."

Author: Bernd Riegert, Brussels / gb
Editor: Michael Lawton