Massive Eurozone infrastructure deficit requires urgent redress

The latest – EIB Investment Report 2017/2018 – published last week by the European Investment Bank tells anyone who cares to take those Europhile Rose Coloured Glasses off for just a second how deep the failure of the European policy making structures are and how long the negative impacts of those failures will resonate. This is the true ‘burden for our (their) grand kids’ sort of stuff. In claiming they had to run tight fiscal policy biased towards surpluses to avoid forcing the future generations to carry an unfair burden, these European policy makers and leaders have done exactly the opposite, as predicted – they have created an appalling future for their youth and their children to follow. The whole European monetary experiment is a failure and is beyond reform. It needs to be scrapped, national sovereignty restored and people within their own countries left, through democratic institutions to determine how the public sector operates in their best interests. The Troika technocrats should be led out to pasture. And, to the Europhile Left: take of your rose coloured glasses.

I have previously documented how infrastructure is falling apart in the Eurozone. I discussed a visit in 2015 to Porto and more recent experience in Germany, where fiscal surplus mania has meant that its trucks can no longer transit important bridges to other nations, which is undermining their export model.

There is now widespread infrastructure failings across Germany.

I have also discussed how the current European Commission President’s grand scheme to revitalise Europe – the so-called Juncker Plan or EU Infrastructure Investment Plan” – was so badly underfunded and implemented that little benefit has come from it.

Whereas massive capital injections are needed in the Eurozone after two decades of starved public investment the policy makers hand out pennies, so obsessed are they with fiscal austerity.

Please read my blog – The chickens are coming home to roost for Europe’s so-called powerhouse – for more discussion on this point.

Meanwhile the Europhile Left keep telling everyone that there is a reform process in place which will bear ‘progressive’ fruit and that people should be patient and see this process out.

Talk about head in the sand. Not only is the human capital (particularly the future adults) being seriously eroded by mass unemployment and welfare cuts, but it is also clear the physical (productive) capital in now in a dire condition.

Taken together the long-term costs of this period of economic lunancy – the Economic and Monetary Union – will be massive and damage prosperity for decades.

Major surgery not tinkering around the edges is needed. The Europhile Left is living in cloud cuckoo land if they think a reform process will deliver outcomes that promise higher net benefits in the long run than an exit and dissolution approach.

As I noted in the Introduction, even the European Investment Bank is now documenting the massinve failure in infrastructure provision due to the austerity obsession in the European Union.

To put the EIB Report in context, the following graph shows the change in the aggregate investment ratios from the June-quarter 2007 to the June-quarter 2017 for most Eurozone nations (and the EU28 and the EU19 taken as wholes).

Some nations (for example, Slovakia) do not have reliable comparable data to do this calculcation.

The investment ratio is the proportion of Gross Domestic Product accounted for by Gross Capital Formation and indicates how much of the current production each nation is allocating to expanding productive infrastructure.

Potential GDP and hence longer-term growth is driven by capital formation. A nation that is not investing in its future productive capacity will see declining productivity growth, falling standards of living and leave its grandchildren materially deprived.

The graph is stark. Only Ireland (through accounting shifts mainly), Malta, Belgium and Austria recorded increases.

Greece went from an enjoying investment ratio of 26.6 per cent in June 2007 (well above the EU28 and Euro19 averages) to a staggeringly low 9.5 per cent in June 2017.

That almost amounts to a decimation of its productive infrastructure and potential.

Spain went from 31.5 per cent to 20.7 per cent. Italy from 21.9 per cent to 17.1 per cent. Portugal from 22.5 per cent to 16.6 per cent. Latvia from 43.8 to 21.9, although this is still above the EU19 average of 20.8 per cent in June 2017.

There is a dual characteristic of investment spending. While investment adds to aggregate spending in the current period it also adds to the productive capacity of the economy. To fully utilise the growing productive capacity the economy must also experience appropriate aggregate spending growth.

This means that the income level that might be consistent with full employment of capital and labour in the current period will be deficient over time as the productive capacity grows via investment expenditure.

Thus, aggregate spending has to grow in the next period to ensure the extra capital is fully utilised. The expenditure side of the economy can be seen as always chasing the growth in capacity that it creates.

Starving the economy of investment expenditure reduces national income now but also reduces the future growth path.

The EIB Report suggests that investment expenditure has “reached an average of 3.2%, clearly exceeding the 1995-2005 average of 2.75%”.

Although, when I do the calculation in real terms (deflating for inflation), the difference between the periods is much lower (just 0.4 points per annum on average).

However, despite some recovery in investment spending overall, the EIB notes that they:

… see many areas in which investment is still being held back; on the other, we see long-term, structural challenges facing Europe that require an acceleration in far-sighted investment.

They note that:

The recovery is now turning a spotlight on structural investment needs: innovation, skills, infrastructure and sustainability. The EU continues to fall behind global peers in terms of R&D spending …

Significantly, the EIB says that “There is no recovery yet in infrastructure investment – undermining Europe’s long-term potential”:

Infrastructure investment appears to have stabilised at 1.8% of EU GDP, down from 2.2% in 2009. The decline is strongest in countries with the lowest infrastructure quality, pointing to a slow-down in the convergence process. The main driver of the slow-down has been fiscal policy choices that have been biased against long-term capital expenditure, while corporate infrastructure has also struggled to keep up with pre-crisis rates, in part due to regulatory pressure on allowed returns. Municipalities report a significant infrastructure gap and see fiscal constraints, rather than access to finance, as the main obstacle.

They also find that:

1. Nations have pursued “current account surpluses … at the expense of investment”.

2. “EU firms continue to be net savers overall, suggesting that many firms are unwilling to invest despite a liquid financial position”. This is, in part, due to an ongoing “deleveraging path” which helps “explain the modesty of the recovery, and bank lending to firms continues to stagnate”.

Which is unsurprising given that the crisis was a balance sheet recession. As I noted last week, a balance sheet recession requires the government to run elevated fiscal deficits for an extended period to allow the non-government sector time to restructure balance sheets via increased saving (lower spending than usual).

This is a slow process and requires years to decades of overall saving in the non-government sector to accumulate in debt reduction.

Support by on-going fiscal deficits is paramount. Exactly the opposite to the way the Eurozone Member States have been bullied into behaving.

Please read my blog – Balance sheet recessions and democracy – for more discussion on this point.

The EIB recommend (among other things) that:

  • There is a need to re-prioritise public infrastructure investment …
  • Enhancing the productivity and competitiveness of the EU economy requires attention to be paid to innovation, including investment in intangibles, particularly skills, as the EU is falling behind peer economies in this regard. Skills are an important priority, relevant across Europe, as is R&D spending, but policy should also target all types of intangibles.

Their analysis shows that:

1. “EU infrastructure investment is 20% below pre-crisis levels” – so the talk of higher average annual growth rates since 2013 must be understood in the context of the lower base after the collapse during the crisis.

The areas most impacted appear to be transport – roads, rail links, bridges etc and there are massive divergences spending across Member States on these essential infrastructure items.

While the poorer nations, such as Greece, Spain, Ireland etc have cut their infrastructure spending dramatically to give the impression that their public spending is falling within the Stability and Growth Pact fiscal rules, even nations such as Germany, has reduced essential infrastructure spending.

The EIB note, for example, that “Lack of access to digital infrastructure increased considerably in Germany” among the other nations since their last report.

A recent OECD Report (April 2017) – Towards a Better Globalisation: How Germany can respond to the Critics – concluded that “Germany lags behind the OECD average” on many digital infrastructure components (broadband, education, IT skills generally).

It says that “Public investment has been low and has declined markedly at the level of municipalities … which have reported large unmet investment needs in schools and other educational facilities … This is problematic in light of the important role that high-quality education plays for inclusive growth”.

And: “There is also a need for additional investment in Germany’s transport infrastructure and its digital infrastructure”.

So it is not just the poorer nations that are in infrastructure-deficit. Even the powerhouse of Europe is seriously degrading its future prosperity, while its government boasts about the fiscal surpluses it is running and bullies other nations into pursuing a similar strategy.

The EIB Report concluded that:

… the quality of available infrastructure in most EU countries has declined over the past decade. The decline is particularly relevant in Germany, Belgium, Cyprus and Sweden …. The quality of infrastructure declined in lockstep with investment (or lack thereof) in the sector … driven down primarily by the fall in government investment.

The EIB Report concluded that:

In 2016, general government investment in the European Union (EU) reached a 20-year low as a share of GDP … The level of government investment in the periphery and more generally in the euro area is particularly low when compared to pre-crisis and historical levels … low government investment will inevitably be detrimental to cohesion, competitiveness and growth potential … In 2016, government investment in Italy, Portugal, Ireland, Spain, Croatia, France and the Netherlands, was at its lowest (or close to lowest) point since 1995 …

2. “Firms 45% rate of their machinery and equipment as state of the art” – so the quality of the productive equipment is declining and the EU is clearly lagging in this area.

3. “34% of municipalities say infrastructure investment is below needs” – the austerity has damaged lower-levels of government which actually supply essetial services in many nations.

The EIB inform us that “About 50% of infrastructure investment in Europe happens at the sub-national level, where fiscal constraints and administrative capacity are the key problems”. The austerity obsession at the Member State level feeds down to the municipalities as the national government seek to cut fiscal deficits.

The point here is that infrastructure spending is, in a way, easier to cut politically, because the adverse consequences are less immediately noticable and start to impact beyond the political cycle the governments are engaged in.

It is hard to cut welfare payments to individuals who then end up on the street in mid-Winter without housing, food and adequate income.

It is much easier to defer maintenance on bridges as the traffic will keep flowing for years without the deterioration becoming, as it is now in many parts of Europe, dangerous.

The EIB say that “The decline in government investment was offset by increased current expenditure”, which assists in maintaining current growth but undermines future growth potential.

This point is clearly evident in the following graph (Figure 7 from the EIB Report).


I have been compiling evidence in recent blogs to support the contention in our new book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017) – that the Eurozone should be broken up and currency sovereignty restored to the Member States.

As I explained in my previous book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (Elgar, 2015) – breakup is just the first step.

Abandonment of the neoliberal obsession with fiscal rectitude (especially as it is lining the pockets of the top-end-of-town) is the other necessity.

But overcoming neoliberalism will not be sufficient for the Eurozone Member States. They also have to be able to use their own currencies to advance well-being.

The damaging infrastructure deficit in Europe as a result of the fiscal madness the policy makers have imposed will resonate for years to come. It needs urgent redress.

This is in addition to the catastrophic youth unemployment situation.

Yet the Europhile Left are content with a slow-moving reform process that has no guaranteed outcomes which will grind away producing a series of compromises that avoid the main issues – as is the norm for the modern day (dysfunctional) European Union.

It is well past the time they should have taken off their rose coloured glasses

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.

This Post Has 17 Comments

  1. And here in the USA we also face over a trillion dollar backlog of infrastructure work.

    Meanwhile, China is building infrastructure like mad.

    What will happen with their new silk road railroad which could make it easier to use Chinese transport inside and outside Europe than EU infrastructure

  2. Bill,
    UK missing from first graph but seems minimal change in the second?

    Greece (unlike its fellow suffers) spending less on interest in 2 nd graph?


  3. I can attest to that for Spain at least. Public services are being run down. There is a dearth of new infrastructure or industrial policies everywhere. In Extremadura, for example, people is imploring for a modernization of trains more typical of XX century. The government is relentlessly pushing for the privatization of all the public services. It’s a disaster, but a slow motion one.

    I will definitely read Reclaiming the State. In things continue this way, Brexiters are going to look smart compare to the rest of us.

  4. Why not calling this “Europhile” left for what they are: faux progressives that are only against neoliberalism as long as it doesn’t affect their middle class privileges and luxuries. In my opinion these people are as much chauvinist as the most xenophobic of UKIP supporters, they just extend the borders of their chauvinism from the British Isles to encompass the EU nations (anything outside the EU for them is not truly Europe). Their trick is to hide it under an apparently liberal facade. In reality, they do not care if European migrants (or for that matter migrants from other locations outside of Europe) get exploited by dodgy employers through underpayment. As long as these faux progressives can claim that they are really open, tolerant and multicultural, who cares if migrants get exploited and get scapegoated for what is essentially a problem of capitalist exploitation?

    It’s frustrating that clear and insightful analysis that prof. Mitchell is providing sadly doesn’t get the airing that it deserves as opposed to the hateful xenophobic rantings of Farage and their ilk. The fact that criticism of the EU has been dominated by the far right, it says more about the British left than about the far right. These faux progressives confuse supporting an aggressive trading block with a very pro-corporate bias for internationalism. They are still under the delusion that the EU is a bulwark against capitalist exploitation when in fact the EU is an enforcer and protector of that very same capitalist exploitation. This Euro-chauvinism that earlier I alluded to is just a manifestation of the delusion that somehow European capitalism is more benign, less aggressive and exploitative than its Anglo-American counterpart. It’s analogous to when you get former colonial nations claiming that their past colonialism was more enlightened and less bloody than other rival nations.

    I suggest that people search for articles in the Guardian related to the Greek bailout negotiations of 2015 and have a good thorough look at the comment sections. There you can find pro-EU commentators displaying the most vile vindictiveness towards Greece, and what is even worse, glee at the prospect of the ruination of the Greek population. The outright racism on display was sickening.

    I truly wish that prof. Mitchell stops being treated like the Cassandra of Greek mythology and his prescient warnings truly heeded. The constitutional, structural and ideological problems of the EU as an institution are too serious to be brushed aside.

  5. How much longer will the reactionary stance taken by Germany last? I had read elsewhere that long detours have to be taken by trucks because some important bridges were unable to take the originally designed loads. Maybe some serious accident needs to occur? Then it might trigger a rethink.
    It’s almost like the financial sector is so dominant today that the productive sector which dominated before 1970 is now not considered so valuable thus allowing Britain’s manufacturing to decline and London’s financial hub to dominate for example. It also suited neo-liberal policies, including anti-unionism for example.

  6. Just a thank you Bill for all your splendid work – I imagine that you must often feel that you are banging your head against a very thick wall.

  7. I guess I count as a member of the “liberal left” (although definitely not in the “elite liberal left”!), reading The Guardian and being a member of the (UK) Green Party.
    But I also have become an EU-sceptic and (thanks to people like Bill) a Euro(the currency)-sceptic.
    However, although the UK is (thank goodness) not in the Eurozone, we still have restrictions, e.g. on our rate of VAT, and limitations if we wanted to renationalise public services. Not that any Tory government would want to, but I still live in hope of a future progressive government (perhaps a Labour-Green coalition) wanting to do so, and also taking control of housing and the banks, and within the EU, I believe we are severely restricted in what we could do, even if we wanted to.
    What always surprises me is that people (especially in the “liberal left”) seem to confuse being culturally European with the politics of Europe. I feel much more culturally close to Europe than I do towards the USA, but it doesn’t mean I want to be ruled by “Brussels” or anyone else. I’m not a raving British nationalist, but the fact is we are a nation state, and I think that it’s only at the national level (and below) that my democratic voice can make any difference. The larger the EU has become, the more distant it seems to have become (despite travel having become easier within it).
    The scandal, to my mind, is that we allowed ourselves to sleepwalk into the “ever closer union” without understanding the implications. The blame partly lies with politicians and intellectuals of all political colours, and also partly with the electorate for its general apathy towards political matters, especially international matters. And of course, with the popular press, and their highly dubious agenda.

  8. The renationalization of public services is not limited by the EU according to some legal experts. There is a good deal of false news in this domain.

  9. Thanks again Bill for your valuable information.
    You are one of the few lone voices of sanity and truth in the world of economics.
    We are up against the enormous power of the greedy.
    Surely we can come up with an intelligent strategy to find their Achilles Heel.
    I keep searching for one and I pass your information on to whoever I can.
    We don’t have too much time left.
    All the best

  10. Hi

    I’m no constitutional lawyer but looking at the link from Richard Corbett and having a quick superficial look through the index of the treaty for relevant parts, on balance I’m coming down on the side of could only nationalise with permission of the Commission.

    Richard Corbett refers to Article 345 which says “The Treaties shall in no way prejudice the rules in Member States governing the system of property ownership”. So I suppose it depends on whether bringing an entire railway system into national control counts as part of a system of property ownership.

    Transport is covered at Title VI and Article 96 says “The imposition by a Member State, in respect of transport operations carried out within the Union, of rates and conditions involving any element of support or protection in the interest of one or more particular undertakings or industries shall be prohibited, unless authorised by the Commission.” So I’m thinking that if the government said all operation of railways is done by one publicly owned organisation that would be a condition involving protection in the interest of one undertaking which would therefore need authority of the commission.

    Maybe like a lot of things it would depend on circumstances. Likely large and influential countries or large and influential companies which had their government backing them would do what they wanted with less significant challenge than others. Similarly those countries would tend to carry more influence if it came to legal review I should think.

    If someone has time to look properly or already fully acquainted with the treaty I’ll stand corrected in advance.

    Cheers John

  11. “The renationalization of public services is not limited by the EU according to some legal experts.”

    Yes, the Labour conference was full of that – “why the EU isn’t going to stop us doing what we want to do”. With lots of ‘experts’ stating their opinion. All you have to do is get down on your bended knees and ask the sainted individuals in the commission if it is OK, and of course they will say yes – as long as you give rich people lots and lots of ‘compensation’.

    Unfortunately they all forgot the actual impact of the EU. Which is that I, as a private citizen if I have enough money can overturn an act of parliament by appealing to the constitutionalism in the EU treaty. And it is that that corporates use to stop governments getting in the way of them making a killing at the hands of ordinary people.

    Of course the little people can have their government and democracy – as long as it doesn’t get in the way of what actually matters.

    EU law stops radical proposals ever getting off the drawing board. It stops radical governments ever being elected. It is the imposition of the demonstrably failing US constitutional arrangements on Europe propped up by a bunch of elite political scientists who simply don’t believe in representative democracy that delivers real power for change.

    When the NHS was created a devastated UK with few real resources simply moved the cottage hospitals from private to public ownership with a single line in an Act of Parliament. If that was attempted today, the owners of the cottage hospitals could use EU law to stop it – and therefore stop the creation of truly public healthcare free at the point of use based upon need, not ability to pay.

    That is the vice of the EU – vesting private individuals *with money* control over the elected parliament. An elected parliament has to have complete control over its domain. The protection is that it cannot bind its successor.

  12. @vasco quite,exactly the anti greek rhetoric was sickening.yet ppl like ppl who question eu are percieved as bigots?

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