Polish proposal undermines credibility of Stability and Growth Pact

Poland’s finance minister Mateusz Szczurek warned on Tuesday that the EU’s new European Fund for Strategic Investments (EFSI) is underfunded. He called on EU member states to support the new growth plan of EU Commission president Jean-Claude Juncker with own means. In return, member states should be given guarantees that their contributions to the fund will not be counted as part of the national deficit in terms of EU budgetary discipline, Szczurek demanded.

Szczureks demands go in a dangerous direction. Already today there are many exemptions when it comes to calculating the public deficit under the Stability and Growth Pact. The bulk of these exemptions may be economically justified. However, by steadily increasing the number of exemptions the Stability and Growth Pact risks losing its binding force and, thus, its credibility. The Pact will be decreasingly less able to assure the credit sustainability of EU member states. And one should not believe, that capital markets could be fooled by the kind of window dressing the Polish proposal recommends.

The EU-Commission in December put forward its “Investment Plan for Europe” which is to trigger investment of up to 315 billion euros. The plan entails next to the establishment of of the EFSI an “investment advisory hub” at the European Investment Bank (EIB).

The cep argues in a Policy Contribution that policy makers should earmark eight billion euros in the EU-Budget to serve as EU-guarantee to the EFSI. They should also attempt to limit potential losses of the EFSI. This is best done by the EIB issuing bonds with a contract clause entailing that creditors will be serviced only as long as EFSI losses do not exceed 21 billion euros.

Moreover, the EU-Commission should self-commit itself to fully applying EU-state aid law both to investment projects which profit from EFSI support only and to projects profiting from additional national financial support. Most of all, legal certainty in European and Member States’ regulation must be increased. This is a cheap and very effective way of removing barriers to investment.

Dr. Matthias Kullas, Head of Economic & Fiscal Policy Department, kullas(at)cep.eu

Dr. Bert Van Roosebeke, Head of Financial Markets Department, vanroosebeke(at)cep.eu