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Tuesday, June 10, 2003

Italy Proposes Large Infrastructure Project for EU

This proposal from Italy, which is being presented as a contibution to Europe's search for a growth model, looks extremely dubious. The only 'novely' seems to be that it would use privately raised finance effectively guarenteed by the European Investment Bank, which in its turn would be guaranteed by the individual member states. In practice this means no-risk projects guaranteed by public funds. I fail to see what is new in this proposed model for growth. Since all the risk is assumed by public finance, it is merely a kind of SPV for keeping the money of the public books, and thus not violating the Growth and Stability Pact. All this has rather the smell of Japan about it, with infrastructural projects of unproven worth being financed to keep the construction industry moving in the search for a new growth miracle.

Italy's centre-right government on Monday launched an initiative to revive economic growth in Europe with a multi-billion euro spending programme bringing together private sector finance and the European Investment Bank. Giulio Tremonti, Italy's finance minister, said the plan envisaged annual expenditures of 50bn-70bn euros ($58.5bn - $82bn), equivalent of up to 1 per cent of the European Union's GDP, mainly on infrastructure projects in the EU's 15 member states and the 10 countries on course to join the EU next year. "The message is: 'Something must be done, collectively'," Mr Tremonti told the Financial Times in an interview. "It is an urgent matter. We need a model for growth." The initiative was formally communicated on Monday to other EU governments and is intended to be a central element of Italy's six-month term in the EU's rotating presidency, which starts on July 1. Italian officials say they are open to suggestions from other EU countries and the European Commission about how to improve the plan, but hope the broad idea of large-scale infrastructure spending will win approval as early as next month from EU finance ministers.

The plan aims to square the circle of European economic policymaking by stimulating domestic demand without increasing national budget deficits and putting more strain on the EU's stability and growth pact. Some politicians and economists have blamed the pact, which sets rules on EU fiscal discipline, for aggravating Europe's economic problems by imposing limits on spending at a time of weak growth. But Mr Tremonti emphasised that Italy's initiative was not intended to undermine the pact. "The action programme is totally compatible with the stability pact," he said. "The supply of capital would be private, the financing of the infrastructure plans would derive from the market."

The plan aims to attract the private sector by creating a pivotal role for the European Investment Bank, an institution that has been the largest supplier of funds over the past 10 years for the EU's Trans-European Network (TEN) infrastructure projects. The bank could provide guarantees for private project financing, including for long-term projects that have an investment grade rating. For such guarantees to be fully effective, Italy is suggesting that EU ministers consider giving the bank a zero risk-weighting. Another Italian proposal is for the bank to set up a special purpose vehicle, in co-operation with EU member states or national transport authorities, that could buy portfolios of TEN loans from national financial institutions, securitise them and issue triple-A bonds to the market.

This would release new resources to be invested in TEN projects, while ensuring capital relief for the financial institutions, Italian officials say. Italy first raised the idea of an action plan for growth last April and suggested that projects could be financed outside national budgets, for example by means of special EU bonds. However, Germany was reluctant to endorse the idea of increasing public debt in the EU, while the UK feared that such methods might lead to more centralisation of European economic policy.
Source: Financial Times

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