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Wednesday, November 26, 2014

Juncker's investment plan gets cool reception

This is the name which has been given to the long touted €315bn investment fund which European Commission President Jean-Claude Juncker has put front and centre of his programme to deliver jobs and growth. The key points of the proposal (EC press release, Juncker speech, Katainen speech) are:

  • €315bn investment from 2015 – 2017. This is made up of a €16bn guarantee from the EU budget (a 50% guarantee from €8bn of the budget) and €5bn from the European Investment Bank (EIB). This money will be used as a guarantee to raise the targeted €315bn from private financing on the market.**
  • Of the total spend €240bn will go towards long term investments and €75bn to SMEs/mid-cap companies.
  • The EFSI will be under the umbrella of the EIB but will have different goals and do a different type of lending.
  • In conjunction with the EFSI the Commission will create a “project pipeline” along with technical assistance to help identify viable projects for investment at EU level.
  • The investment plan will also contain a road map to remove sector specific regulations that hamper investment, with a focus on the financial sector to tie in with the push towards a Capital Markets Union.
This is the opening salvo of a plan which has long been muted. Judging by the initial reactions, the plan leaves something to be desired. Some thoughts below:
  • As an opening salvo, the plan has already been watered down from what many had expected it to be – a real attempt at fiscal stimulus. Whether or not you agree with that prospect, it’s clear this plan does not constitute such an attempt. As it now enters the negotiation phase with approval from the member states and European parliament needed it could still be restricted and fudged further.
  • This process seems very similar to previous attempts to create such a fund in 2012 (discussed by us here) and the failed attempt to leverage the European Financial Stability Facility from 2011 (which fell down on the reluctance of the ECB to be involved and the level of public guarantees were not sufficient and too highly correlated with potential risks). History suggests pinning significant hopes on these sorts of plans is not usually a good approach.
  • It’s not clear that this buffer will be enough to encourage private investors to take on greater risk. There are numerous factors which are leading to a lack of private investment, risk (at these levels) is only part of it.
  • Furthermore, to the point above, reports now suggest that the €21bn will actually be used by the EIB to borrow €63bn in bonds and cash which will then be used as a first loss buffer for the private investors – however, this does not seem to be mentioned in the press release, factsheets or Q&A. Additionally, we’re not sure what rating these bonds issued solely as loss protection would get or who would want to invest in them (seems akin to the lower riskier mezzanine tranches of asset backed securities).
  • The promise to review the regulatory issues and create a central system of projects could actually prove to be more important than the funds themselves. That said, we have often heard the first point and the Commission has never followed through. The latter project has potential but the focus will be around “EU value added” and “EU objectives”. We’re not sure why the EU thinks it has a better idea of the returns and benefits on private investment than the market more broadly. Furthermore, these objectives already cloud what should be a simple idea – promote economic growth.
  • More generally, questions can be asked about how these funds will be targeted. The focus seems heavily on pan-European infrastructure. While there are sectors where this could be useful – energy and high-tech – such a rigid focus is not needed for a general fund. Many parts of Europe (notably Spain) loaded up on infrastructure in the boom years; they do not really need more of it. What is really needed across Europe is investment in human capital, (re)training and R&D.
  • All this once again highlights the huge amount of waste inside the EU budget, which could of course fill some of these roles. It also raises questions about whether the EIB should rethink its investment priorities.
Overall, the response from all sides has been very lukewarm. The plan seems very similar to previous iterations and, for better or worse, does not involve new money. Negotiations are likely to further impact the structure, while questions can be raised about the target and agenda included in the fund. The accompanying proposals for a project pipeline and improving regulation could be useful and tie in with plans for a single market in capital. That said, the EU’s track record on these fronts is not good and will likely take some time for any real impact to be seen.

**Correction: A previous version of this blog post said €294bn would be raised from private finance. However, the aim will actually be to use the €21bn as a guarantee on issuing €315bn worth of bonds on the market, meaning the entire €315bn will be private financing.


Jesper said...

I suppose the idea meets the criteria: 'We need to be seen to be doing something'.
Other than that....
Maybe question 11 in the Q&A is what it is all about. EU increases its regulatory impact in the areas of: energy, telecom, transport, services and research.

& I'm guessing that if this were to generate any successes then those will be EU-successes, while all the failures will be national-failures. Accountability EU-style.

Or maybe this will not be like other funds controlled by the central-planners in EU-institutions?

Denis Cooper said...

Well, some people laughed at Jesus when he said that he would feed five thousand with just five loaves and two fish, but he did it and with some to spare, so maybe Juncker can pull off a similar miracle.

jon livesey said...

All I see here is the member states funding a kind of coup by which the EU takes control of an enormous amount of spending - assuming the financial engineering works out.

I think a good question here is whether the ECB would allow individual member states to raise and spend their own investment funds in this way.

Rik said...

Riskmanagement of a drunken baboon.
If you can spread the risk over say 100 things it could have worked spread wise. But effectively this will be over a very limited no of countries with a few biggies. Worstcase should be covered and with fall out to other countries. Normal stats simply are not applicable here.
Yieldwise it looks crap as well btw, hard to see governmental projects making a yield that could could pay for a normal interest seen the risk.
In other words, likely creating toxic crap that can be bought by the ECB.

Anyway what is in it for the UK. Probably a lot of risk via implicit guarantees. It concerns the EU and not the EZ.
Possible another potential opportunity waisted to get the reneg up and running.

In other words likely the funds will indirectly be used to postpone necessary structural reforms. And the more they are needed the longer they will be postponed (as relatively much will go to the Greeces, Frances and Italies of your continent).
Economic recovery simply doesnot depend on very liquid investments, it depends on people investing with a long term horizon and directly in hardware. That is where new jobs are created.
That kind is not going to happen unless the businesssector in general (but especially the SME part thereof) sees clearly light at the horizon and not postponing.

Luca Tonelli said...

for sure. the EC estimates the fiscal multiplier at about 1 for public spending and the one from this 21 billions should be something about 15.

is this a comedy or what? but did they ever study the subjects they graduated in?

Rollo said...

It is a pipe-dream. We put up a little money which we can print for you for free. You investors will put up ten times more, of your own real money at your own risk. What an offer! What an oaf!

Average Englishman said...

This plan smells of desperation and uses the same sort of poor risk analysis approach that led the banks to cause the all to recent financial crisis.

I cannot help but think this plan will just make the pain and fall out from the ultimate crash worse rather than avert it. Also, who will be the international financial geniuses who buy into this mad plan and invest private money into it?

Denis Cooper said...

Further to the above, I note that the collective GDP of the EU member states is around €14 trillion a year, so even if this plan was to fully succeed in generating extra investment of about €0.1 trillion a year that would be a drop in the ocean.

In answer to this, on page 4 of its Q&A sheet the Commission states:


"It would be naïve to believe that there is a simple, single answer to fix Europe's investment problems. The Investment Plan put forward by the Commission is part of a comprehensive approach to accompany growth and the creation of jobs in Europe by combining structural reforms, fiscal responsibility and a boost to investment. All national governments must contribute their fair share. The EU cannot pull it off alone."

I'm not particularly happy about that imperious statement:

"All national governments must contribute their fair share"

given that the problems have their roots in the past actions of some national governments more than others, in particular their decisions to abolish their own national currencies and adopt a single EU currency.

Denis Cooper said...

I said to myself that I couldn't be bothered to check up on the legality of this scheme under the EU treaties, as no doubt there would be various provisions buried in the treaties which could be bent for Juncker's purposes; and even if they were bent beyond breaking point we know from experience that hardly anybody cares about breaches of the EU treaties provided that they are in the cause of "ever closer union", which of course takes precedence over the mere rule of law; indeed even the Tory party here doesn't care about that even though they say in public that they are opposed to "ever closer union".

(As an aside for Rik especially, when many people were confidently predicting that the eurozone would fall apart I argued to the contrary that the eurocrats would do whatever they possibly could, legal or illegal, ethical or unethical, to preserve it intact so that later it could resume its expansion and engulf the whole of the EU, including the UK; and that is what has happened, and both the Labour government and the coalition government have gone along with that even though it is patently against our long term vital national interests.)

However looking at the Q&A sheet from the Commission I find on page 13 that it is proposed to pass a Regulation based on one or more of Articles 172, 175(3),182 and potentially 173 of the TFEU; and checking those articles I find that only in the case of proposals based on Article 182 would the UK government be able to exercise a veto if it disagreed with the use of a treaty provision or disagreed with a particular decision, and this is despite the risk that would inevitably be assumed by the UK government on behalf of UK taxpayers.

Moreover as the legal act would be a Regulation, not a Directive or a Decision, it would have direct effect and immediately become law throughout the EU without our Parliament having any say in the matter; and it is almost needless to say none of this is covered by anything in Hague's so-called "referendum lock" law, the European Union Act 2011, which law would not even require the government to get a motion passed by Parliament before it agreed to whatever Juncker wanted.

Unknown said...

How will all the privately financed money be repaid and who will the EU owe it to ?