Financialisation is on the march again

It is very much open to question whether Albert Einstein could have got his head around the exotic financial instruments, the notorious ‘casino’ paraphernalia, that brought the global economic house down in 2008.

But consider some practical advice of his: “We cannot solve our problems with the same thinking we used when we created them.”

Then consider a recently proposed financial scheme, hatched in Brussels and Luxembourg reputedly with backing from the UK, Germany and France and encouragement from certain tarnished financial giants such as Morgan Stanley and HSBC.

It is an opaque financial blueprint that seeks to place additional billions of public money in the clutches of the financial sector in order, it is asserted, to boost the beleaguered European economy.

The scheme, presented by the European Investment Bank and the European Commission to the Council of Ministers back in June, involves risk-sharing, whereby EU member states would contribute a portion of their EU budget funds for 2014-2020 in support of lending to small- and medium-sized enterprises (SMEs).

At this month’s European summit, officials are expected to report back on how the proposals have been received by the banks and investors, and in Europe’s capitals.

Public EU budget money may be central to the plan – just don’t expect the views of the public itself to feature when this agenda item is discussed.

The securitisation scheme would see the pooling of individual state contributions to provide for a joint guarantee for new and existing SME loan securitisations. With a target figure of €10bn in contributions, it is anticipated that this could be swiftly leveraged to potentially give rise to €100 billion in SME lending.

What this latest type of financial engineering is designed to overcome is the miserable performance of Europe’s leading banks in lending to the real economy – this despite all the colossal public handouts that have come their way.

The underlying rationale being put about by the EIB and the Commission is that with risk shifted to the taxpayers’ purse (via EU budget money), the banks will be compelled by the scheme’s structure to recycle this risk into new SME lending and attract private investors who otherwise would consider such loans to be too risky.

While this logic may appear plausible, a lot of unknowns remain.

Will the private sector bite sufficiently to achieve anything like the touted, highly ambitious tenfold leverage rate? What of the likely chaos such additional reshuffling of spending lines would involve for member states at this late stage in EU budget proceedings?

And then there is the role of the EIB.

In the period 2008-2012, to address the impact of the crisis, the EIB ramped up its lending to SMEs. Around €58bn was deployed. It does this via ‘intermediated lending’ – private banks receive EIB funds, and then lend them on to businesses.

This set-up has been criticised for its lack of transparency and its ineffectiveness. SMEs themselves have also been critical, with complaints that EIB funding has languished in the banks, or been offered at non-advantageous (given the recessionary backdrop) market rates.

The EIB is continuing in this vein. A further €40 billion is meant to be ploughed into lending for this sector up to 2015.

Former EIB vice president Matthias Kollatz has recently called for EIB lending to the sector to be "further expanded."

Yet with a related, even more complex scheme now on the table, the European Parliament and Commission should be insisting on a full public audit that shows what EIB lending to small businesses has really achieved in the last five or so years.

The European public and decision-makers must no longer be fooled into acceptance of these schemes, where eye-catching leverage calculations distract from the lack of concrete evidence.

Whether it is the current securitisation proposal, or other EIB-Commission pet projects such as the ‘Project Bonds Initiative’, one thing is clear: financialisation is on the march, again.

While the austerity thumbscrews are still being tightened, the same thinking that created the problems is being deployed to solve them.

But whose problems are being solved?

As the EIB’s proposal document on how to support SMEs via the financial markets casually observes, it is “revitalising the securitisation market as a channel to mobilise more resources and redistribute risks across the economy in a sustainable way.”

If there is “sustainability” involved in this scheme, just ask yourself – for whom? And where are these risks being “redistributed”?

Antonio Tricarico leads the New Public Finance programme at Re:Common in Italy. Markus Trilling is EU Funds coordinator for CEE Bankwatch Network.