European Commission President Jean-Claude Juncker’s economic recovery plan corresponds to zero commitments of new public expenditure.
BRUSSELS — The welcome gift handled to the new head of the European Commission by the International Consortium of Investigative Journalists could not be more poisonous: a report on the tax favors he conceded from 2002 to 2010 (he was then both prime minister and minister of finance of Luxembourg) to hundreds of multinationals through an international consultancy.
Luxembourg authorities did not deny the essence of the facts, did not offer themselves to publish hand-outs handled through other consultancies and in other periods of time and did not announce plans to change their ways, since, as they emphatically stressed, their action is totally within the relevant European and national law.
The Maastricht Treaty created an economic and monetary framework based on the absolute freedom of movements of capitals, strict controls of national, regional or local budgets, harmonization of consumption taxes but requirement of a unanimous Council vote to touch income taxes. This resulted necessarily into massive fiscal optimization movements in favor of those with a sufficient dimension to pay for an army of accountants and financial engineers with dramatic economic and financial consequences.
The timorous European Commission attempts to give the idea that something is being done about this have required a great dose of juridical contortionism and have all been sufficiently water downed in lengthy complex procedures where Luxembourg veto power has played a key role.
Jean-Claude Juncker, the former Luxembourg prime minister, was a bit more careful responding criticisms than his successors. Other than announcing an ongoing Commission initiative as if he had plaid any role in it and producing grandiose empty political statements, Juncker did not commit himself to any single concrete step to address this state of affairs.
In the European Parliament only some members in the far-right of the political spectrum proposed a political censorship to the European Commission—many of the sponsors, however, did not even bother to vote—a censorship that was rejected, not even the ultra-left supporting it.
One could not imagine a more complete disregard by all the main European political actors for this issue that lies at the heart of income inequality and of any possible European economic recovery.
Mr. Juncker duly announced a 315 billion euros (392 billion dollars) economic recovery program that could help to forget the other billions of tax gifts handled to multinationals.
The program openly confuses public expenditure with credit expansion. The overall credit target to be managed between 2015 and 2017 by a trust fund created by the Luxembourg’s based credit institution (BEI) is indeed 315 billion euros, but this is essentially money to be found in the financial markets through a loss-risk coverage hand-out by public funds.
The program estimates a ratio of 6.7 percent of own funds to credit, or a multiplier of 15, which does seem to be a reasonable expectable multiplier. What one should take in consideration is that these own funds correspond to a guarantee of 5 billion euros given by the EIB from its own funds, and 16 billion euros given by the European budgets, 8 from the exercises from 2015 to 2017 and the remaining 8, presumably, from the budgetary exercises of 2018 to 2020.
More to the point, none of these 16 billion euros will be fresh money; they correspond entirely or to funds already committed and approved or to future budgetary transfers.
So, Mr. Juncker’s economic recovery plan corresponds to zero commitments of new public expenditure and a promise of 315 billion euros of new private financial credits along three years obtained through a risk subvention scheme.
Just to keep things in perspective, the first time the European Central Bank announced a stimulus plan in the beginning of this year, a figure of a thousand billion euros in purchases per year was advanced, although to this day it is unclear the global amount the ECB is actually doing and committing itself to do.
We can therefore consider Juncker’s plan to be a minor version of the proposed Draghi stimulus plan. The main difference is that where Draghi’s plan may have an impact on public budgets—if his intention of indirect purchase of public bonds will go through—Juncker will have directly none.
It is therefore business as usual and not economic stimulus what we are speaking about.
Paulo Casaca is a Portuguese politician and was a Member of the European Parliament. Read other articles by Paulo.