Is an ECB backed investment bank a better idea than QE? Varoufakis thinks so.
In Europe, we are wasting time. Varoufakis tries to break the deadlock: the continent is awash with money but, despite record low-interest rates investment rates are low. In a very well written speech he proposes a solution, based on the ‘Modest proposal’ by Holland, Galbraith and Varoufakis. The sting in the tail: there will be another undemocratic ‘federal’ institution, an investmentbank, backed by the ECB. Maybe this institution might, to an extent, make up for the lack of fiscal policy on the Eurozone level, at least by restoring part of the monetary transmission channel, i.e. provide a level playing field when it comes to financing projects in the different countries in the Eurozone. While it might also make up for the present lack of government investment in at least some countries. And it might make the present, asset price increasing, kind of QE superfluous. My idea: the European Parliament will have to get large supervisory powers over this bank. An excerpt:
Here is what the ECB could do to achieve its objective while overcoming both its ‘operational problem’ and the ‘macroeconomic concern’:
- The European Investment Bank (EIB) should be given the green light to embark upon a Pan-Eurozone Investment-led Recovery Program to the tune of up to 8% of the Eurozone’s GDP, concentrating on large scale infrastructural projects while its offshoot the EIF concentrates on start-ups, SMEs, technologically innovative firms, green energy research etc.
- The EIB has been issuing bonds for decades to fund investments, covering 50% of the projects’ funding costs. It should now issue bonds to cover the funding of the Pan-Eurozone Investment-led Recovery Program to the full; that is, by waving the convention that 50% of the funds come from national sources.
- To ensure that the EIB bonds do not suffer rising yields, as a result of these large issues, the ECB ought to announce its readiness to step into the secondary market and purchase as many of these EIB bonds as are necessary to keep the EIB bond yields at their present, low levels.
The merit of this proposal is that, essentially, it recommends that the ECB enacts QE by purchasing a single asset; the solid, non-toxic, non eurobonds issued by the EIB on behalf of all European Union states. Thus, the ECB’s operational concern about which nation’s bonds to buy is alleviated. Moreover, the proposed form of QE backs productive investments directly, as opposed as to inflating risky financial instruments.