European intervention mechanisms for growth: Budget and the European investment bank

Abstract

The EU's handling of the recent financial crisis gives much more weight to fiscal consolidation than to growth stimulus. Because the fiscal multipliers during crisis periods are significantly higher than previously estimated, the consolidation policy requires a second pillar for growth to avoid a vicious downward spiral. The first elements of this second pillar were adopted by the EU summit in June 2012, but the scope of the programme for growth and employment is not sufficient nor has it been implemented with the necessary speed and scope. This article calls for a systematic approach to increase the public intervention capacity to ignite sustainable growth. The main public financial instruments are the budget and the promotional bank at each level in Europe. The contribution of the promotional banks has grown since the eve of the great crisis. Volume and impact can be increased further. The main objectives are revolving funds, combined financial products bringing together loans and budget, focusing on viable projects and attracting private capital for projects where suitable. An optimisation of the budget for better leverage, better allocation efficiency and viable projects improves the impact significantly within given volumes. Even more enforcement seems possible if the budget grows to some extent to enlarge the anticrisis capacity. © 2013 University of Durham and John Wiley & Sons, Ltd.