Growth deal of €120bn hangs in the balance

City A.M. Reporter
ITALY and Spain last night blocked final agreement on a stimulus package, saying that they would hold out until they won promises of immediate help in reducing their borrowing costs.

European Council President Herman Van Rompuy said that European leaders had agreed to devote €120bn for “immediate growth measures” to try and dig the Eurozone out of the crisis.

Van Rompuy said half the money in the new growth pact would come from increasing the lending capacity of the European Investment Bank (EIB) by €60bn, adding that “this money must flow across Europe, and at least to the most vulnerable countries” to help them grow out of the crisis.

That includes €50bn in already existing EIB money, plus €10bn in new capital, as it loans alongside private investors.

But the EIB’s board has cautioned that it may have difficulty in finding projects that meet its standards.

Then there are €55bn in funds that were already earmarked in the EU’s 2013 budget for growth projects in poorer regions around Europe.

Finally, the pact will make another €5bn in “project bonds” available to invest in transport, sustainable energy and digital infrastructure. While the EU budget will provide some risk cushion for the EIB to finance the underlying projects, the EIB would have to cover the remaining risk.

But Italy, Spain and some other countries said that they wanted the Eurozone to agree steps to help bring down their high borrowing costs first, including steps to buy their government bonds in order to bring down yields.

“We’re in favour of the growth pact and there is a deal on the content, but before we sign it we want a comprehensive deal including short-term measures” a Spanish government official said.

An Italian offical said it also wanted immediate measures to relieve Italy’s borrowing costs. “We see it as a package,” he said.