Thursday

18th Jul 2019

Analysis

Europe's 'last chance' investment scheme depends on pension funds

  • The European Investment Bank is increasingly being looked at as a potential saviour of the EU economy (Photo: incurable_hippie)

During his successful campaign for the European Commission presidency, Jean-Claude Juncker described his flagship plans for a €300 billion investment programme as ‘Europe’s last chance’.

Despite disappointment in some quarters about the lack of any ‘new’ money or extra public investment, the ambitious scheme outlined on Wednesday (26 November) by the new Commission chief received a cautious welcome from most politicians and business groups.

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Nobody wants the scheme to fail, and that is why governments and the centre-right and left groups in the European Parliament have been quick to back it. But given that the programme actually amounts to only €21 billion of ‘seed’ money, which has been recycled and reallocated from existing funds, it is hard not to be cynical. A ‘big bazooka’, it ain’t.

A new European Fund for Strategic Investments (EFSI) will be set up in partnership with the European Investment Bank (EIB), built on a guarantee of €16 billion from the EU budget, combined with an extra €5 billion committed by the EIB. The leverage ratio is 1:15, a much higher ratio than has been used for most of the EIB’s previous lending.

Although it is unclear how this leverage level will be achieved, EIB boss Werner Hoyer appears comfortable with his new role. Like Mario Draghi’s European Central Bank, the EIB is increasingly being looked at as a potential saviour of the EU economy.

But Hoyer underscored the fact that, as with Europe’s banks, the money is there but institutions still have to be persuaded to use it. “We have ample liquidity in Europe, but we don’t have enough investments,” he said, adding that “we are faced with a crisis of confidence, so the challenge is to re-connect private investment with attractive projects.”

More leverage, more risk

The trouble is that the greater the leverage, the more risk the EIB has to take on. This means that it is more likely that it will be easier to fund projects in Europe’s wealthier north, where the risk is lower, than in the EU’s poorest countries and regions which need the investment the most.

For example, private investment in Greece, Ireland, Portugal and Spain, all of whom have needed some form of EU bailout, fell by over 40 percent between 2007 and 2013.

However, more risk also puts the EIB’s triple A credit rating in jeopardy.

Meanwhile, routing the money through complex financial instruments to maximize returns makes it more likely to go through the funds that operate on the edge of national tax laws which EU politicians have been so critical of.

Aside from these dilemmas, the main question, however, is whether the programme will work.

€315 billion over three years sounds a lot but it is really only a step forward. The ETUC and Business Europe, representing trade unions and companies respectively, are unlikely bed-fellows but agree that much more is needed. Business Europe argues that the programme equates to a 2 percent increase, “a figure that we already expect to be achieved under most ‘business as usual’ forecasts as the economy continues to grow moderately”.

Returning EU investment to the sustainable levels seen at the end of the 1990s would require an extra 2 percent of GDP – equivalent to between €240-€260 billion – each year for the next decade, the ETUC contends.

ETUC general secretary Bernadette Segol argues that more public money is needed to complement private investment, even if it increases government deficits temporarily.

Pursuing pension funds

That said, the infrastructure investment gap is far too big to be closed by an injection of public money, with or without the EU’s economic struggles, and few would dispute that private pension funds and insurance firms offer a sizeable and largely untapped source of investment.

According to an OECD report in 2011, the value of pension funds, insurance companies and mutual funds across its 34 member countries, many of which are EU members, was over $65 trillion (€52 trillion) at the end of 2009.

The report also estimated that a mere 1 percent of pension funds were invested in infrastructure across the globe. The question is whether they will be enticed by the plan.

The logic is that, like pension funds, infrastructure schemes are long-term projects, making them a good match.

The programme’s success is also likely to be tied to that of the proposed Capital Markets Union, another long-term project that is unlikely to be completed before the end of Juncker’s term in 2019.

In the same way that the Capital Markets plan aims to make EU companies less reliant on banks, which currently provide 80 percent of business finance, and follow the example of the US where companies get five times as much funding from securities and bond markets, the Juncker investment plan seeks to make infrastructure investment reliant on private rather than public money.

The challenge for the Commission will be to avoid administrative delay in deciding which projects get off the ground. Every EU country has been tasked with providing the EU executive with a list of potential projects that can start between 2015 and 2017 to be assessed by a panel of experts before final decisions are made.

The peril of over-selling

Bernadette Segol worries that the programme could end up like the EU’s so-called ‘jobs and growth’ pact agreed in 2012, which was supposedly worth €120 billion, but mainly consisted of a €10 billion capital boost for the EIB.

“Too often we saw EIB’s money was invested in safe countries,” she tells EUobserver, adding that the pact “quite clearly did not work”.

It is difficult to avoid parallels with the phantom ‘growth and jobs pact’ which quickly became a subject of ridicule, an example of EU leaders promising much but delivering little.

The danger for Juncker is that his much vaunted plan ends up being another grand project that was oversold and under-delivered.

The truth is that there is no magic wand. As the ECB and policy-makers have found in their attempts to persuade banks to increase their business lending, increasing private investment in infrastructure projects is predicated on investors recovering their confidence in the European economy.

This will require more than €21 billion and good intentions.

Opinion

Juncker’s shadow Bank

The set-up of EU commission president Juncker's new investment fund is legal but it does not make for sound public finance.

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