Wednesday, October 17, 2012

A Perennial: Jouyet to Head Public Investment Bank

As if to underscore Hollande's remarks that austerity is not enough (see previous post), Prime Minister Ayrault has announced the nomination of Jean-Pierre Jouyet to head the Public Investment Bank. Jouyet is an old Europe hand: he handled Europe under Jospin and then again under Fillon. France seems to favor such perennial technicians in key economic policymaking positions.

As for the Banque Publique d'Investissement, you may recall that it was originally to have been the Banque Européenne d'Investissement, but Germany and France did not see eye-to-eye on the project, so now it is a France-only bank, seriously undercapitalized, and unlikely to accomplish much beyond financing the pet projects of regional party bosses. Or am I too cynical? There is no shortage of loanable funds in existing banks. The problem is a shortage of projects for which banks are willing to lend in the current climate of deficient demand. So creating a public bank to lend to enterprises that private bankers consider too risky has obvious dangers.

Is Hollande Part of the Problem?

Perhaps it's too soon after my surgery for me to take on the problems of the eurozone, but Hollande's interview with The Guardian is forcing my hand. He is quite critical of Angela Merkel, whom he accuses of putting German domestic politics first, and calls on his European partners to make sacrifices for the continuation of the Union. No sooner has he said that, however, than he gives "short shrift to a German push for the creation of a federalised eurozone or political union."

If that is his position, then he surely owes it to those same partners to spell out how he intends to resolve the crisis in the long run without major institutional change. Instead, he digs at those who have proposed such change: "The institutional issue is often evoked in order to avoid making choices. It hasn't escaped my notice that those quickest to talk of political union were often those the most reticent to take urgent decisions …"

In short, he wants to put all the burden of adjustment on Germany, without offering Germany anything in return. This is a strategy very unlikely to yield results, it seems to me. The crux of the issue is what a federalized eurozone would mean. Germany wants to impose budgetary discipline by means of sanctions with teeth. What Hollande ought to be proposing is a union with a broader mandate, to harmonize social policies, make transfer payments, facilitate labor mobility, and pool investments in research and education. Instead, he simply attacks austerity, as he did in the election campaign, before he implemented the primary instrument of austerity, the TSCG, after taking power.

Once again, it seems that Europe's leading politicians have squandered six months in useless posturing, while the only effective action to keep things afloat has been taken by Mario Draghi. But Draghi has warned that the ECB cannot solve this problem on its own. A political solution is needed--a solution for which he has tried to buy time with his creative financing. But Hollande does not seem to share his sense of urgency: "We are near, very near, to an end to the eurozone crisis," said Hollande. But decisions taken at the last EU summit in June had to be implemented "as fast as possible".

To be fair to Hollande, he does point out that major institutional change was tried in 2005 and failed. So perhaps he is simply being realistic. But in this case, realism seems to be heading straight into a wall.