Merkel's bumpy road to austerity

Germany's Angela Merkel has bowed to the anti-austerity outrage that is growing in Europe by giving the thumbs up to European infrastructure plans, but will it be enough to silence the critics?

The high-priestess of austerity, German Chancellor Angela Merkel, has bowed to the anti-austerity outrage that is growing in Europe, by giving her blessing to a limited range of measures aimed at bolstering economic growth in the recession-ravaged region.

The measures are expected to be unveiled next week, after the final round of the French presidential election on the weekend. Recent polls show that Socialist challenger Franois Hollande, who has signalled that he wants to renegotiate Europe’s "fiscal pact” to put more emphasis on growth, remains on track to beat the current incumbent, Nicolas Sarkozy, even though his lead has narrowed.

Hollande has promised that if he wins the final French presidential election, he will immediately send other European leaders a "memorandum” proposing a number of changes to Merkel’s precious ‘fiscal pact’, including the creation of new "eurobonds” to finance future industrial and infrastructure projects, and a greater role for the European Investment Bank (EIB).

But although Merkel has said that the fiscal pact is "not renegotiable”, she appears to have bowed to pressure to accept some of Hollande’s growth initiatives – provided they can be done without Berlin having to dig too deep into its pockets.

According to a recent report in the Spanish newspaper El Pais, Brussels is preparing plans that could see up to €200 billion of new investments, focusing on infrastructure, renewable energy and high-tech projects.

According to the report, the plan is to make use of the €12 billion that’s left in the eurozone’s original bailout fund to recapitalise the European Investment Bank and to provide guarantees for bonds issued by infrastructure projects, with the aim of attracting private sector investors, such as pension funds.

The German publication, der Spiegel, has a similar report. According to der Spiegel, Brussels is planning to announce plans to launch "project bonds” to finance major infrastructure projects next Monday and European Union president Herman Van Rompuy wants the plans approved at a summit in late June.

As the article points out, the huge appeal of "project bonds” is that it’s left to the private sector to provide the bulk of the funding. In the initial pilot phase of the program which would last until 2013, €230 million in eurozone money would be used to generate €4.6 billion in new investments.

In addition, Brussels is planning to inject an extra €10 billion in capital into the EIB. This would allow it to lend an extra €60 billion to major eurozone projects. If private sector investors, such as pension funds, were also involved, Brussels calculates that €180 billion in fresh funding for projects could be raised.

Importantly, Brussel’s scheme has Merkel’s blessing. According to der Spiegel, the German government "supports the scheme as a way of financing new highways, along with energy and telecommunications networks.”

But it remains to be seen whether Germany’s token concession towards a growth initiative is enough to silence the growing howls of protest coming out of Paris, Lisbon and Madrid against the tough spending cuts and tax hikes that make up most of Merkel’s austerity cure.

Follow Karen Maley on Twitter @karenmaley.

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