Juncker’s plan for kick-starting investment
Since the start of the financial crisis, investments in the European Union have fallen by 15%, and this slams the brakes on growth and job creation.
The EU Heads of State and Government met in a European Council on 18-19 December in Brussels. They warmly welcomed Jean-Claude Juncker’s plan, which aims to create a ‘European Fund for Strategic Investments’. The mainstream parties of the European Parliament also gave it their resounding approval. It is a positive sign when people are finally talking about investment at European level rather than continuing to lose their way in the murky depths of Eurozone governance. Still, we should remain cautious about the success of this new Fund – for a number of reasons.
Firstly, the declared total of €315bn for this new investment fund is far from being a sure deal. There is no new money for the new fund, given that the European Commission has no mandate to take out capital loans and the Member States have only tiny margins for adjusting their budgets. The fund will be capitalised with just €16bn coming out of the European budget and the rest, €5bn, from the European Investment Bank (EIB).
Secondly, this sum of €21bn of public money would be guaranteeing the tranche with the greatest risk of default for investment projects. After that, private investors will be contributing the capital for the tranches less exposed to risk. By relying on a multiplier effect of 15 between public money and private capital, the European Commission has calculated that the total financing budget could reach €315bn (21 x 115 = 315). This looks more like multiplying loaves of bread, and there are serious doubts that this supposed leverage would actually work. Experience shows that using a multiplier factor such as this one is not realistic for social investment projects or for general infrastructure projects for opening up remote regions. It can be used for projects such as building tolled motorways or for a railway line linking an airport to a city centre.
However, in order to mobilise a fraction of the €15 trillion of private savings in Europe, projects of this kind must be found on the continent of Europe. At the moment there is a preference for investing money elsewhere in the world where the return on investment is higher, or in shares of public debt which are far less subject to risk. It is vital to be cautious here since, due to the lack of an environment that encourages investment, projects such as these are hard to find in Europe nowadays.
That is why Philippe Maystadt, the Belgian former EIB president, has declared that financing will not be the only problem needing to be resolved in order to relaunch investment in Europe. It is also why he is calling for a review of the European regulatory framework, which he would like to see offering greater stimulus to private investment. By that he means, for instance, that more weight should be given to market forces in the infrastructure industries (energy, transport) and there should also be a rejigging of the 'Solvency II’ package to bring down the costs of long-term investments for insurance companies.
Finally, it remains to be seen whether the Member States will agree to the idea that it will not be them but committees of experts from the EIB and the Commission that will be selecting the projects for this new investment fund from the 2000 proposals already submitted by the Member States. The statement of Jyrki Katainen, Commission Vice-President in charge of the project, that the projects would be “selected according to their merits and without any specific quota by sector or by country” will not be a simple matter to execute.
Whatever happens, the fact that people are once again talking about the future and about investing in Europe is a good sign. We just hope that the new investment fund will be well and truly operational in June 2015.
Translated from the original text in French