Wednesday

14th Nov 2018

Opinion

The EU investment plan: The good, the bad, and the ugly

  • Jean-Claude Juncker unveiled the plan soon after he became European Commission president (Photo: ec.europa.eu)

With modest economic growth, zero inflation, and declining public and private investments, European leaders are desperately trying to find ways to grow.

They will meet on December 18 and 19 to discuss and, hopefully, deliver on the so-called Junker Plan, a project to mobilise around €315 billion ($400 billion) in new investments over the course of the next three years.

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This will then create a specialised fund called the European Fund for Strategic Investments within the European Investment Bank (EIB).

This is part of a three pronged strategy: easing credit conditions and inflating prices through the European Central Bank, national structural reforms to be delivered by national governments, and stimulus to internal demand through additional investment.

The proposal cannot be easily written off as all “good” or all “bad” since it contains some positive elements, but many questions remain regarding how it will be implemented.

So, what is good, bad and ugly in this proposal?

The good

First the good. Most within Europe now realise that the euro crisis is not just a matter of dysfunctional markets but is also due to a lack of internal demand.

Structural reforms to make European markets and firms more competitive can deploy energies and act on the supply side of the economy, but in order to make them work, additional demand is needed.

The European Central Bank (ECB) can take action on inflation, but very little for economic growth. So a new investment plan is welcome, not only for the Europeans but also for the American business community that can find new investment opportunities.

Since the outset of the great recession, public and private investment in the EU dropped by 320 billion euros. With lower growth and lower public revenues, governments cut the easiest expenditure i.e. public investment. With tight credit conditions, high leverage ratios at the firm level, and overall lack of consumer confidence, the private sector halted investments.

The so called Junker Plan tries to put investment at the core of a strategy to re-launch the European economic potential.

The aim is to restore the same level that Europe had before the crisis. The strategy is to try to channel private sector resources toward initiatives that might have strong positive spillovers for employment and growth. In other words, governments are conscious of the budget constraints and are trying to develop a political economy strategy using private instead of public money.

The public arm is the European Investment Bank that, despite a largely public capital account, behaves as a private financial institution, assessing risks of loans and charging them consequently. The method is to leverage public money with private equity so that investment can largely (or totally) be financed by private investors.

The bad

Now the bad. While this strategy merits attention and support, national governments are clearly not committing to providing additional resources to increase investment, neither from the EU budget nor from governments’ budgets.

Also, there is nothing new in the Junker plan: most EU countries and the European Investment Bank already use the same financial tools to finance growth, such as public guarantees to private loans, public private partnerships (PPPs) for infrastructures or national development financial entities as KFW in Germany, Caisse des Depots in France or Cassa Depositi e Prestiti in Italy.

Finally, the ugly. The plan leaves many questions unanswered:

The ugly

First: Why will projects that need to be financed be proposed by national governments and chosen by the EIB, since cash will be almost totally private?

This risks there being a mismatch between what governments are willing to realise and what instead the private sector considers profitable.

Second: Will the new fund run the risk of compromising the credit rating of the EIB, currently triple-A? The EIB issues bonds to finance its activities and benefitted so far from a high reputation by the financial markets.

Third: Why is this fund different from already established initiatives of financial engineering already in place in Europe? Here the risk is a duplication of activities.

Fourth: Since money comes from the private sector, how will European institutions avoid that most projects will be financed in those countries that are more profitable due to their more successful economies, therefore increasing the gap between dynamic economies and sluggish ones?

Fifth: How long will the execution of the plan take, given the tight EU state-aid rules? Europeans are obsessed with state-aid rules to avoid unfair competition within the EU, and any project that benefits from some public support must follow certain criteria. All this can delay the whole process.

A quick response to these questions might transform a good idea into a concrete and impactful tool for the sluggish European economy.

Nevertheless, it important not to attach too many expectations to the Junker Plan solely, as is happening for the likely quantitative easing by the European Central Bank early next year.

A tangible result will materialise only if all these actions together change confidence and let Europeans firms start investing again, and foreign investors see Europe as a reliable place for the years ahead.

Andrea Montanino is director of the Atlantic Council’s Global Business and Economics Programme. He is the former executive director of the International Monetary Fund.

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