German think tank advocates new EU bonds to boost growth

Ireland's investment gap is the highest in the euro zone at 9.4 per cent of annual economic output (gross domestic product), a leading German economic institute has warned.

To close the gap and stimulate the real economy, Berlin’s Institute for Economic Research (DIW) proposes issuing new EU investment bonds, with the new Strategic Banking Corporation of Ireland financing a national investment agenda.

DIW economists say such a co-ordinated programme at European level could pump capital into the real economy to drive growth, side-stepping traditional definitions of state borrowing that would shatter the 3 per cent deficit ceiling in the stability and growth pact.

The German proposals make for interesting reading ahead of Taoiseach Enda Kenny's visit to Berlin on Thursday, where he holds bilateral talks with Chancellor Angela Merkel and addresses the economic council of her Christian Democratic Union (CDU).

Investment shortfall

The DIW study compared euro zone countries’ current total investment – in big ticket items such as machinery, factories, roads and bridges – with the total needed to generate stable growth.

Ireland is the country with by far the largest investment gap of 9.4 per cent, almost twice the Dutch investment gap of 4.8 per cent. The average gap in the euro zone, according to the DIW research, is 2 per cent of total GDP, or €200 billion annually in absolute numbers.

An investment gap is evident right across the continent and dates back to before the euro crisis, the DIW economists write, but has been exacerbated by recent turbulence.

In essence, the DIW is proposing a structure similar to the European Stability Mechanism bailout fund, with a focus instead on the shortfall in lending and investment that is squeezing the real economy.

The DIW’s solution is a five-year special investment plan overseen by the European Investment Fund, part of the European Investment Bank. Its proposal would see the fund raising its own capital by issuing bonds guaranteed by EU member states. Their backing would guarantee low interest rates from investors, a financial benefit which could be passed on to borrowers.

"Such a fund would be particularly helpful in Ireland, building up new capacity by stimulating private investment and securing long-term growth potential," said Dr Ferdinand Fichtner, DIW chief economist. The proposal is welcome news for Italian prime minister Matteo Renzi, leading lobbying efforts for EU members to agree greater flexibility in existing debt rules.

The DIW proposals are likely to be opposed by leading economic figures in Germany, but backing is likely from Dr Merkel's Social Democratic Party (SPD) junior coalition partner and its leader, Sigmar Gabriel.

In recent weeks Mr Gabriel has indicated understanding for calls from Italy and France for greater differentiation between day-to-day spending and long-term investment.

Desire for leeway

Already senior ECB officials have suggested some additional leeway might be desirable. “Investment has decreased too much in the crisis and it is needed for the future of the citizens . . . Governments need to create the right environment to stimulate private investment,” said ECB executive board member Benoît Cœuré to the

Süddeutsche Zeitung

on Saturday.

In its annual report, the Bank for International Settlements urged governments not to abandon the path of fiscal sustainability. But “where need is great”, it urged governments to “catalyse private sector financing for carefully chosen infrastructure projects”.

It has pegged Ireland’s investment gap even higher than the DIW – at 14 per cent.