A Sovereign Wealth Fund For The Eurozone? - by Henning Meyer

Social Europe Journal has just published its latest Research Essay “Public Capital in the 21st Century” by Giacomo Corneo. The main argument of the paper is that the state should become a kind of investment state in order to make sure that high returns on capital do not further increase inequality but benefit the wider public. To achieve this, Corneo argues that governments should set up sovereign wealth funds to manage their investments and take advantage of low interest rates on sovereign bonds as investments should be debt-financed.

Having read the paper I was wondering whether this would also be an option to create the much-touted fiscal capacity for the Eurozone. Such a mechanism wouldn’t need Eurozone taxes or tax harmonisation (although both would be desirable) and does not require an open-ended commitment to joint debt. Here is how it could work: Let’s assume a Eurozone debt instrument backed by all governments can borrow for 1.5% in financial markets.

 For the sake of it let’s assume an annual return of 6% on a globally diversified portfolio, which is a realistic scenario. 25% of the return would be required to service the debt and Corneo argues that the rest should be used to pay back the principal so the debt incurred will be repaid in 15 years or so. I would argue that the remaining 75% of the return should be split between repaying the principal and increasing the size of the fund. So an alternative split of the return could look like this: 50% repayment of debt, 25% debt service, 25% increasing the size of the fund.

The key points are that the initial debt will be fully repaid after a defined period of time (so there is no open-ended commitment to joint debt) and that such a sovereign wealth fund could create a significant amount of revenue that could be the income source for a Eurozone budget. The budget would be administered by a Eurozone group in the European Parliament and could be used to help stabilise the currency area.

Apart from the need to complement this pro-cyclical instrument with counter-cyclical measures (issuing debt for current spending rather than investment that would also be repaid with priority?) that should kick in if there is a general crisis, I cannot see a reason for why this wouldn’t work, especially given that a budget of about 2% of GDP is regarded as big enough to effectively counterbalance asymmetric shocks.

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"Dutch economy is poised to improve" - says Dutch Central Bank President Klaas Knot in Davos

The Netherlands recently kept its triple-A credit rating from Fitch, which said that the decision reflected the country’s strong underlying economic, institutional and credit fundamentals.

The rating agency kept the outlook at negative, however, because of the Netherlands’ weak economic growth prospects.

Another rating agency, Standard & Poor’s, stripped the Netherlands of its top-grade AAA rating in late November, also citing its low growth prospects.

So far that has left Germany, Luxembourg and Finland as the only members of the 17-nation euro zone with the coveted top rating from all three leading credit agencies.

Moody’s, which still rates the Netherlands triple-A with a negative outlook, will publish its next update on March 7th.

Note EU-Digest:  The Dutch economy is poised to improve after house prices stopped declining and consumer confidence rose, Dutch Central Bank President Klaas Knot said. 

“There is no need to think that the Dutch economy will structurally lag the euro zone any longer,” Knot, 46, who is also a member of the European Central Bank’s Governing Council, said in an interview at the World Economic Forum in Davos, Switzerland. “We will have to wait for mid-February to see whether the fourth-quarter gross domestic product numbers confirm the gradual recovery.” .

The Dutch economy, the fifth-largest in the euro area, emerged from a year of recession in the third quarter as exports benefited from a nascent recovery in the currency region. The country has gone through three recessions since the origins of the global financial crisis in 2007.

Read more: Fitch affirms Netherlands credit rating - Economic News | Ireland & World Economy Headlines |The Irish Times - Fri, Jan 17, 2014

and at: The Dutch economy is poised toimprove - Bloomberg

Attention Geert Wilders and Marie Le Pen: Eurozone posts euro 13.1-billion September trade surplus

The eurozone posted another big 12-month increase in its trade surplus on Monday, the latest monthly data from the EU's Eurostat agency showed.

The first estimate for September gave a 13.1-billion-euro surplus (US$17.7 billion) for the trade in goods with the rest of the world, compared with 8.6 billion euros in September 2012.

A trade surplus is one of the factors of growth in an economy, whereas a deficit tends to sap growth, and so achieving a trade surplus is of critical importance to economies in crisis.

Read more: Eurozone posts 13.1-billion September trade surplus: EU