Bloomberg View

Euro­pean equiv­o­ca­tion • One Medi­care fix: Sen­si­ble drug pric­ing

Bloomberg Businessweek (Europe) - - CONTENTS -

Europe needs whole­sale re­form of its fis­cal frame­work, but it lacks the nec­es­sary po­lit­i­cal will and pop­u­lar sup­port. Un­til this changes, try­ing harder to pro­mote in­vest­ment would be more ef­fec­tive than just hop­ing for the best.

Europe’s rules re­quire bud­get deficits to be no more than 3 per­cent of na­tional in­come. Spain’s is 5.1 per­cent; Por­tu­gal’s 4.4 per­cent. In ad­di­tion, coun­tries are sup­posed to keep pub­lic debt at no more than 60 per­cent of in­come. Of the Euro­pean Union’s 28 mem­bers, only three have con­sis­tently com­plied with both rules. At the mo­ment, nine coun­tries are sub­ject to pro­vi­sions of the so-called ex­ces­sive deficit pro­ce­dure, al­though the Euro­pean Com­mis­sion has rec­om­mended Cyprus, Ire­land, and Slove­nia be let off for good be­hav­ior.

In the­ory, vi­o­la­tors can be fined as much 0.2 per­cent of gross do­mes­tic prod­uct. In prac­tice, Europe doesn’t dare. What sense would it make to pun­ish an econ­omy, like Spain’s, that’s al­ready strug­gling—not to men­tion the fact that it cur­rently lacks a gov­ern­ment? The EU is un­pop­u­lar enough al­ready.

Fully re­pair­ing the fis­cal sys­tem re­quires a back-to-ba­sics re­think and the cre­ation of a lim­ited form of fis­cal union for coun­tries that are mem­bers of the euro zone. For the mo­ment, with vot­ers look­ing askance at any and all EU ini­tia­tives, that’s out of the ques­tion. But two less rad­i­cal ap­proaches would help in the mean­time.

First, boost pub­lic in­vest­ment. The need is clear: Net pub­lic in­vest­ment in many coun­tries has been low for years and es­pe­cially since the fi­nan­cial cri­sis; in Bel­gium, for ex­am­ple, it has been zero for decades. In­fras­truc­ture in­vest­ment would cre­ate de­mand in the short term and boost growth in the long term.

A suit­able in­sti­tu­tion ex­ists for the pur­pose: The Euro­pean Fund for Strate­gic In­vest­ments aims to at­tract pri­vate cap­i­tal for wor­thy projects that re­quire pub­lic sup­port. Up to now, the EFSI has ap­proved around €9.3 bil­lion ($10.4 bil­lion) of fi­nanc­ing for in­fras­truc­ture projects. It’s a new body, but it needs to scale up—a lot and fast.

Sec­ond, sup­port wholly pri­vate in­vest­ment by ac­cel­er­at­ing ef­forts to de­velop an in­te­grated mar­ket for cap­i­tal and es­pe­cially equities. This may be the best way to help the EU cope with eco­nomic shocks and foster catch-up growth in its poor coun­tries—more ef­fec­tive, even, than a func­tion­ing fis­cal union. It re­quires a more de­ter­mined as­sault on reg­u­la­tory im­ped­i­ments to in­tra-EU cap­i­tal flows, har­mo­nized in­sol­vency laws, the long-promised bank­ing union, and other steps. Much of this in­no­va­tion can be done with­out the need for a new EU treaty.

The EC solemnly refers to the bud­get rules as the “cor­ner­stone of the EU’s eco­nomic gov­er­nance.” That’s non­sense; those rules are bro­ken. Un­til they can be fixed, move the fo­cus from aus­ter­ity and re­straint to in­vest­ment and growth.

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