Investment in Europe is down 15% – or €430bn – from its 2007 peak and has yet to bounce back from the battering it took during the ensuing financial crisis.
Scarcer investment is holding down growth, keeping millions unemployed and damaging the competitiveness of European companies, especially now that investment is picking up elsewhere in the world.
Public investment in the United States is topping 4% of GDP, double the eurozone level. Yet with banks reluctant to lend and governments and companies constrained by debt, it’s hard to see where Europe is going to find the investment funds its needs.
Jean-Claude Juncker, European Commission President: “This is not old money for old projects. This is about new money for new investment projects that would not have happened otherwise. We are committed to delivering €315bn in extra investment.”
Private sector investors hold the key
Jean-Claude Juncker has responded with the “investment offensive” he unleashed last November, following his election as European Commission president.
The flagship policy of the new Commission would, Juncker told MEPs, represent “the greatest effort in EU history to mobilise the EU budget to trigger new investments.”
The plan comes with a headline-grabbing €315bn of new investment over three years to inject cash into struggling small and medium-sized companies and finance job-creating public works projects, education and R&D.
But that’s where the doubts started; the Commission doesn’t have that sort of money. It will rustle up just €21bn from other bits of the EU budget and from the European Investment Bank, and it wants EU member states to chip in with more. Crucially, it hopes private investors will cough up the most of those €315bn. Many observers have their doubts.
Bernadette Ségol, General Secretary of the European Trade Union Confederation: “The European Commission seems to be relying on a financial miracle like the loaves and fishes. I am not holding my breath for a major impact on growth or unemployment.”
Is the fund large enough to deliver real results? It’s big, but certainly not akin to FDR’s ’New Deal’ in the 1930s
The cornerstone of the plan is a new European Fund for Strategic Investment (EFSI), formed with €5bn from the EIB and €16bn from the EU budget.
In theory, that will act as a risk-cushion that will enable the EIB to lend up to €63bn, and then lure in private investment. In all, the fund is designed to find €240bn for transport, energy, research, social and environmental projects, plus €75bn for SMEs and companies. Juncker and his supporters reject claims that the 1:15 leveraging ratio is too ambitious. They point to the success of the EIB and national investment banks in raising money with similar multipliers.
Even if the plan succeeds in generating all that private funding, there are questions about whether it will have a significant impact on growth, jobs and competitiveness unless Europe also embarks on far-ranging reforms to improve the business climate.
Olli Rehn, former EU Commissioner for Economic and Monetary Affairs; “It is not enough. Publicly-supported investment must be well-targeted for growth and go hand-in-hand with economic reforms.”
Where the money will go
One big risk is that the money will be wasted on “white elephant” infrastructure construction. There is a sad history of EU funding being frittered away on highways to nowhere and on politicians’ pet projects.
The Commission insists that this time it won’t happen. The central role of the EIB should be reassuring as it has a sound track record in viable investment. The Luxembourg-based lender has set up a task force of EU, national and private-sector experts to evaluate potential projects to ensure they contribute to EU objectives, are economically viable and can create jobs fast.
Even before the fund is formally approved, the EIB has given its green light to a number of projects – including renovation work to cut the heating bills of 40,000 French homes, renovating Spain’s gas distribution network, and building 14 health centres around Ireland.
That’s only the start – EU member states and the Commission have submitted over 2,000 possible projects worth a total of €1.3 trillion. They range from €400m to develop “smart manufacturing” in Italy to a €17bn motorway project running through Poland, Slovakia and Hungary and €21bn to finance a British wind farm in the North Sea.
How much are the member states chipping in?
So far, just six EU countries have stepped forward with pledges – a combined total of €33bn from Germany, France, Spain, Italy, Poland and Luxembourg.
Most of that is indirect funding – coming through National Promotional Banks (NPBs). It also comes with a catch – national money is likely to be limited to spending on projects at home.
Member states say they’re supportive of the Juncker plan, but with the four largest NPBs alone enjoying a combined firepower of €1.3 trillion – double the EIB’s balance sheet – they aren’t exactly putting their money where their mouths are.
By September, the plan should actually get moving
The plan took a big step forward in late May of this year, when the Commission, European Parliament and member states ironed out differences over details, so the EFSI can become operational by September.
Werner Hoyer, President of the European Investment Bank: “Time is of the essence, and the EIB has demonstrated it is willing to act fast even in this preliminary phase.”