EU Ideologues “Crowd Out” Sanity

By William K. Black

It is often the small things that best illustrate insanity.  On October 13, 2014, EU Economic and Monetary Affairs Commissioner Jyrki Katainen spoke to emphasize one message:

“[The EU’s leaders] ‘don’t want the [European Investment Bank] EIB crowding out private investment.’  He said the EIB should be used to leverage money from the private sector, ‘and play a part in big infrastructure projects,’ notably ones that have been delayed.”

It’s helpful to situate this smaller example of economic insanity within the broader context of the insanity of austerity inflicted by those same EU leaders.  The general insanity is that the EU politicians are the most economically illiterate and extreme member of the troika.  I just wrote a column explaining that they are bitterly attacking Mario Draghi, the head of the European Central Bank (ECB) for (in their warped interpretation) becoming apostate on the subject of austerity.  The IMF, at least many of its professional economists, left the one truth faith of the austerians long ago when it began publishing research showing that fiscal stimulus was a great success and even its leadership began to warn against austerity. 

As I and many others have explained, austerity has created enormous, gratuitous human tragedy throughout the eurozone.  The situation has become so absurd that Germany is running significant surpluses and its economy stagnates and critical infrastructure investments that would spur current and long term growth go unfunded.  This is madness even under austerian myths.  Austerity has become so conflated with virtue that it has morphed into a monster even in Germany.  The theory seems to have twisted into a violation of one of the core principles of logic – the “fallacy of composition.”  Austerians now seem to think if a surplus is desirable and demonstrates virtue a very large surplus must be great and must demonstrate supreme virtue.   As the German economy stagnates due to self-inflicted austerity Berlin has become an ever more surreal place that celebrates the refusal to fund desirable German infrastructure projects as the epitome of civic virtue and self-sacrifice.

Within that overall craziness, there is within the EU a development bank, the EIB, which was created to fund desirable infrastructure projects, particularly those that have been stalled by inadequate government funding.  When the dominant EU leaders discuss the EIB, however, they do not urge that it spend on these vital projects.  No, they urge the EIB to embrace caution lest the funding of vital, unfunded infrastructure projects “crowd out” “private investment.”  My colleagues have explained why “crowding out” is a myth even in times of strong economic growth. 

But we are not talking about times of strong economic growth.  The most recent overall eurozone economic data showed essentially zero growth.  On the same day that Katainen spoke the ECB released the Banking Structures Report.  The ECB report demonstrates that bank lending – six years after the acute phase of the crisis and eight years after the bubbles collapsed – is billions of euros lower than before the crisis.  Nobody can claim with a straight face that private sector lending is being “crowded out” – or could be “crowded out” – if the EIB were to fulfill its mission.  The proposed EIB spending is a pure win-win-win.  It would fill important needs that would improve safety and reduce cost for things like car repairs.  It would provide stimulus in the near and mid-term through the expenditures increasing employment and growth.  It would enhance long-term growth, which is why even that radical plan – the Washington Consensus – favored government spending on useful infrastructure projects.

When you cannot get the easy things correct that have pure upside.  When you have to create myths (“crowding out” in the midst of stagnation and even a third Great Recession) to purport to explain why the government must never be allowed to do anything useful.  And when you have to create myths that it is virtuous for a sovereign EU government to run a budgetary surplus in these circumstances – myths that violate even the most foundational rules of logic by embracing the “fallacy of composition – you know that the inmates in Berlin have taken control of the asylum.     


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