Window Dressing for Hollande: The Empty Promise of Europe's 'Growth Pact'

French President François Hollande promised his voters a growth pact to counteract Germany's obsession with austerity. Now, he has gotten what he asked for, nominally at least. But the pact, which will be agreed to at this week's EU summit, is full of hot air.

Since becoming French president, François Hollande has countered Merkel on her efforts to save the euro.

Foto: ALBERTO PIZZOLI/ AFP

It is astonishing how quickly a growth pact can grow. When French President François Hollande recently sent his European counterparts a paper entitled "European Growth Pact," he outlined investments worth €120 billion ($150 billion) aimed at stimulating the EU economy.

But by the time Hollande met with German Chancellor Angela Merkel, Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy in Rome last Friday, the sum had already climbed to €130 billion. The reason? The sum of €130 billion is equivalent to 1 percent of the EU's economic output. It simply sounds better.

The growth pact is now set to be agreed to at the European Union summit scheduled for Thursday and Friday. Its supporters, the French Socialist Hollande first among them, argue that the pact is an urgently needed corrective to the EU-wide austerity programs that have been put in place in recent years. According to a draft summit statement, member states pledge to invest in "future oriented areas" and to ease companies' access to credit.

Yet summit participants know themselves that the resolution is little more than a bit of window dressing for voters and financial markets. The pact contains nothing new, according to an internal analysis undertaken by one member state. It is only being agreed to, the analysis continues, so that the new French president can save face. During his presidential campaign, Hollande demanded efforts to stimulate the economy.

"It is all just old wine in new bottles," agrees Daniel Gros, director of the Centre for European Policy Studies, a Brussels-based think tank. "Politicians just want to show that they are taking the desires of the electorate seriously." But, he adds, the effect on the economy will be virtually nil.

The growth pact is made up of three elements:

• EU Structural Funds: In the EU's seven-year financial framework, regional assistance worth €55 billion is planned for 2013. There was also an undefined amount of leftover funding from the 2012 pot. This money is now to be "re-programmed" -- for the fight against youth unemployment, for example, or to assist newly founded companies. Because the money has already been assigned to specific member states, these countries must now decide what projects they want to cancel and which other ideas they wish to fund. The apparent assumption made by EU leaders is that the prior choice of projects to be funded was not optimal and the money can be better used. Still, it is unlikely that the entire sum will now be redirected. Furthermore, the funding does not represent extra money and cannot therefore be considered additional economic stimulus.
• European Investment Bank: The capital of the European Investment Bank (EIB) is to be increased by €10 billion. The extra funding will mean that the bank will be able to offer additional credit worth €15 billion each year for the next four years -- for a total of €60 billion. Within the framework of public-private partnerships, it is hoped that the extra funding will trigger private investment worth several times that amount. Gros, however, says that the idea is "wishful thinking." Private investors, he says, would think twice before making an investment in a crisis-stricken EU country together with the EIB. Should a company go broke, EIB debt must be paid back first, meaning that remaining creditors would likely be saddled with a loss. The EIB is itself skeptical about the amount of money it might be able to mobilize. The number of sensible projects is limited and the bank is only allowed to provide credit when pay back seems practically certain.
• Project Bonds: Private investors who take on loans for the purpose of European infrastructure projects are to receive EU guarantees worth up to €1 billion. The guarantees will allow investors access to better interest rates on the financial markets. Funding for the project comes out of the current EU budget -- no additional money is involved. In total, the project is to mobilize an additional €18 billion in investments. Still, the challenge here too will be finding projects that make sense.

For the most part, then, the growth pact is the product of accounting tricks. It has little to do with the kind of economic stimulus package being demanded by traders in New York and London.

History Repeats

That is largely the result of the pact being primarily politically rather than economically motivated. Hollande promised his voters to complement the fiscal pact with a growth component, and his European counterparts are allowing him this mini-triumph -- in part because they themselves also hope to benefit from the rhetoric about growth. After all, austerity is unpopular across Europe. In contrast to the fiscal pact, for which 25 of 27 EU member states pledged last March to introduce legally anchored debt limits, the growth pact is not a legally binding treaty. Rather, it is just a resolution made by the 27 EU heads of state and government. It will be an appendix to the summit statement.

Officially, of course, EU rhetoric would suggest that Hollande's "growth pact" is on par with Merkel's "fiscal pact." History, though, will likely show that not to be the case. In 1997, during negotiations over the Treaty of Amsterdam, Chancellor Helmut Kohl insisted on a stability pact for the soon-to-be-introduced euro. That part of the deal is well remembered.

In return for his agreement, however, the freshly elected French Prime Minister Lionel Jospin, a Socialist like Hollande, received a pact aimed at creating jobs and growth. The verdict of the German weekly Die Zeit at the time is telling: "That is nothing new. EU summits have promised similar packages … dozens of times over the years."

And this year once again.