Here's Why Investing In European Infrastructure Just Won't Work

Stephen King HSBC

Photo: HSBC

French president Francois Hollande proposed a plan to revive European growth by investing in infrastructure, a move that Italy, France, Spain and  Germany ‘the big four’ agreed to last week.Stephen King, chief economist at HSBC however thinks the idea to raise €130 billion for investment in technology, transport, renewable energy etc. just isn’t going to work. 

First he thinks the amount itself is too small. The amount is less than 1 per cent of a year’s worth of the EU 27’s national income and not “means enough to offset the diet of fiscal gruel most European nations are now living off”. 

Second, King thinks its a mistake to assume lenders will lend responsibly and thoughtfully:

“The underlying assumption is that creditors – the people who lend to the UK, Germany and the US – know what they’re doing. These, however, are the same creditors who, a few years ago, happily lent to Spain, Portugal, Ireland and Greece at ridiculously low interest rates, only to change their minds when the going got tough. By that stage, unfortunately, southern European nations had borrowed more than was good for them, thanks both to their creditors’ earlier generosity and to a hopelessly optimistic view of their own future growth prospects.”

Moreover, he says there has already been a lot of infrastructure spending in southern Europe, but it has failed to save those economies:

“If infrastructure investment equals economic salvation, why have things in southern Europe gone from bad to worse? Why has the Greek economy contracted 16 per cent over the past two years? Why is the youth unemployment rate in both Greece and Spain above 50 per cent? Certainly not through any shortage of infrastructure spending. It has brought neither growth nor higher tax revenues, but instead opened up a yawning chasm in the fiscal accounts. Creditors have taken fright.

In too many cases, large-scale public sector infrastructure projects merely satisfy a politician’s need to “do something”, whether or not the activity involved ultimately delivers the predicted benefits.”

For now King suspects that the West is in danger of making the same mistake as Japan i.e. it will be building “bridges to nowhere”.

Don’t Miss: UBS’s Guide To The Most Troubled Countries In The Eurozone >

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.