The Good, the Bad and the Plain Crazy

The EU Commissariat has just made an announcement that is both good and bad. Let us start with the good: According to European press reports, Chief Commissar Barroso left the commission with an inheritance of 452 legislative initiatives, including the “harmonization of standards of maternity protection”, “uniform energy taxation and environmental protection legislation” and “forcing all nations to implement waste recycling” (if you want to know why waste recycling, which superficially sounds like a great idea, is yet another complete etatiste charade, read this article in which Per Bylund deconstructs the recycling myth using socialist paradise Sweden as an example).

Anyway, the new commissariat under JC Juncker has decided to simply strike 83 of Barroso’s initiatives legacy completely, put a large part of it on hold, and instead concentrate only on a handful – 23 to start with. Also, among the things to be tackled is an endeavor to actually cut red tape (we will believe it when we see it). According to the commissariats own words:

 

“When laws are no longer fit for purpose, or impose too much burden, they will be reviewed and amended to make EU law lighter, simpler and less costly.”

 

So much for the “good”.

However, it is very unfortunate that many of the remaining initiatives they have decided to concentrate on (the bad) mainly consist of bureaucratic nonsense of the finest. Among the top initiatives we find for example: The “€315 billion investment offensive”, an “ambitious digital single market package” (under the leadership of the economically and technologically illiterate digital commissar Mr. Öttinger, whom we have profiled before), and “fair taxation” (the term “fair” in conjunction with the term taxation always means only one thing: higher taxes).

 

We want to once again focus on the bizarre “investment initiative” on this occasion. This project is one we would term both “bad” and “plain crazy”, although the political cronies who stand to be enriched by it would of course disagree.

Passenger stairs are seen in front of the airport in Lodz

The “ghost airport” at Lodz

Photo credit: Reuters

Modern-Day Bridges to Nowhere

For one thing, the EU doesn’t have the money for the “investment initiative”. As Mish has pointed out, the plan is to employ leverage, and one of the enticements offered to private sector participants are “EU guarantees against first losses”. Heads you win, tails we lose. The “we” in this sentence are the EU’s tax cows, who will be paying through the nose for the losses to come.

Why are we so certain that there will be losses? For one thing, the very fact that without the intervention of the politico-bureaucratic apparatus and its carrot of “loss guarantees” no-one would even think of undertaking any of these investment projects proves ipso facto that they are not economically viable. If they were, there would be no need to subsidize them: the private sector would undertake them voluntarily.

Moreover, there is no way for the apparatchiks to ascertain the opportunity cost associated with these projects. They are faced with a variant of the socialist calculation problem. It is a “variant”, because they can actually look at market prices in what is left of the market economy. They are not completely deprived of a basis for economic calculation.

However, since there is no profit motive involved on their part, the question whether the economic resources that will have to be diverted to their projects could not have been used to satisfy more urgent consumer wants will remain unanswered. In fact, it is a virtual certainty that this diversion of resources will result in intra-temporal resource misallocation (we are differentiating here between the inter-temporal misallocation of capital due to monetary pumping and interest rate suppression, and the intra-temporal variety through government spending and subsidization of economically non-viable projects). It is important to realize that the end result will be a production structure out of line with actual consumer wishes and demands, regardless of the precise type of malinvestment that occurs.

For those who want to see some empirical examples that buttress the above contentions, we can offer a glimpse of past EU subsidized investment projects, in this case the example of Poland’s “ghost airports”. Ghost airports are the modern-day equivalent of “bridges to nowhere”, resp. Keynesian pyramid building.

 

“The European Union has given Poland more than 100 million euros ($125 million) to build at least three “ghost” airports in places where there are not enough passengers to keep them in business. The result is gleaming new airport terminals which, even at the peak of the holiday season, echo to the sound of empty concourses and spend millions trying to attract airlines.

Poland is not the only country in Europe to have built airports that struggle to attract flights. Around 80 airports in Europe attract fewer than 1 million passengers a year, and about three-quarters of those are in the red, according to industry body Airports Council International. Some cost much more to build than the Polish projects. One airport in eastern Spain, open for three years, has so far received not a single flight.

But Poland is striking because the country received so much money for its projects from EU funds.

Poland received 615.7 million euros in EU support for airports between 2007 and 2013, according to figures supplied to Reuters by the European Commission. That was almost twice as much as the next biggest recipient, Spain, and more than a third of all member states’ money for airports. The government declined to provide all the information on which it based its decisions to invest in the airports, but Reuters has reviewed data on three sites where traffic fell dramatically short of forecasts.

Poland is often touted by Brussels as one of the most efficient users of EU aid, and there is no suggestion the country used EU airport money corruptly. European help has been vital in improving Poland’s aviation infrastructure, only a small share of the country’s airport spending has been on white elephants, and passenger shortfalls may have been exacerbated by the 2008 global financial crisis. Spokespeople at some airports said the projects could be considered a success because they were creating jobs, bringing in tourists, and driving investment in the regional economy.

But it is clear mistakes were made in Poland, planning officials and aviation executives say. The whole experience raises questions about how the government will handle the next big injection of EU money, which it expects to be 82 billion euros over the next seven years.

The problem is most striking at the recently rebuilt Lodz passenger terminal, where passenger numbers in 2013 fell almost one million short of forecasts, according to European Commission documents examined by Reuters.

On a relatively busy day this summer, just four flights arrived and four departed. In between, the place was almost deserted. In the early afternoon a single passenger, a woman in a blue-and-white striped T-shirt, sat in a 72-seat waiting area. Outside on the tarmac, five sets of movable steps stood waiting for a jet to land.

Where there aren’t enough passengers to make an airport viable, local governments keep them on life support through subsidies, according to a report by CEE Bankwatch Network, a non-governmental watchdog. The beneficiaries have often been the airlines that use them.”

 

(emphasis added)

 

Almost needless to say, the contention by “some (unnamed) spokespersons” that “the projects could be considered a success because they were creating jobs, bringing in tourists, and driving investment in the regional economy” is a prime example of the “broken window fallacy”. It fails to consider that the funds could have been used for something else, namely a project that actually does make commercial sense.

The Reuters report stresses that there is no suggestion that “corruption was involved”, and one doesn’t need to assume that there was corruption in order to prove the point – which is mainly that these are examples of large-scale capital malinvestment, involuntarily funded by EU tax payers. We would however note that corruption is nowhere more likely than in such state-funded projects – the example of the EU funded Italian road in Calabria (scroll down to “Ndrangetha sponsored by EU subsidies”) that remains forever unfinished and is lining the pockets of the mafia is a glaring example.

 

The luggage hall is seen at the airport in LodzLodz airport baggage claim area on a typical day.

Photo credit: Reuters

 

Another important detail is the “cui bono” question. Thus we read that these useless ghost airports continue to require subsidies, lest they would have to be closed down, as they keep losing money every day. And who are the beneficiaries? The airlines that use them – or we should perhaps better say: the airlines that don’t use them.

 

Conclusion:

Poland’s ghost airports should be seen as a clear warning that a massive bout of malinvestment is about to be perpetrated if the EU really pushes through its €315 billion state-funded “infrastructure investment” boondoggle. However, even if we didn’t have such empirical examples at our disposal, economic theory clearly suggests that such undertakings will end up as a giant waste of scarce resources. Can Europe really afford such a waste of scarce capital at this juncture?

Instead of throwing money at the wall in the hope that some of it will stick, EU governments should endeavor to restore free market principles in Europe, by cutting down on regulations and lowering taxes. That would promise to be productive.

 

A plane is seen landing on the tarmac through the window of the control tower at the airport in LodzA rare airplane landing in Lodz – and it’s a pretty small aircraft.

Photo credit: Reuters

 

 

 

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