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.

Marshalling growth in Europe

If talking about growth could create economic growth then the eurozone would be flying right about now.

The latest in a long line of 'pro-growth' proposals for the eurozone looks to be the creation of a new ‘Marshall Plan’ to provide funding for investment projects in Europe. The plan, according to El Pais, is to attract €200bn in investment from the private sector to fund projects geared towards creating growth particularly in infrastructure, green energy and high technology.

Currently, there are few details on the plan available but the main mechanisms for achieving the funding seems to be:

-          Increase the European Investment Bank capital by €10bn, which it is claimed would boost the lending capacity by €60bn and overall investments by €180bn (we assume by some sort of match funding with the private sector or other public funding)

-          Use the remaining €11.5bn in the European Financial Stability Mechanism (EFSM) as initial capital to be leveraged in the private sector (again in a similar way to above)

Clearly, this would be an EU scheme rather than just a eurozone one with proportionate access and funding. This also means that as a contributor to the EIB and EFSM, the UK would be involved, effectively underwriting a chunk of the financing - which could potentially be controversial in Westminster. Remember that the provision and Treaty change designed to put the permanent euro bailout fund (European Stability Mechanism) on a legally sounder footing while simultaneously giving the UK guarantees that it will not be implicated in euro bailouts in future, is still to be ratified in the UK parliament.

This would of course not be a "bailout" though, but something quite different. We hesitate to pass judgement on such an undefined plan, but here are some of our initial thoughts:

-          In principle this could be a positive idea for Europe - we like the focus of the investment and if it is conducted in the right way, it could be worth the UK participating. However, it's hard not to be slightly sceptical about how Europe tends to go about these kinds of schemes, which could instantly undermine that case.

-         The EU's new found infatuation with leverage seems to continue with this idea (which is strange given its views on financial regulation and the causes of the financial crisis). The lack of detail aside, the numbers in the plan seem stretched, at best.

-          Given the fairly limited contribution of European funds we wonder why the private sector would suddenly be so keen to invest in these projects. The project assumes that there is a glut of unfunded investment projects in Europe but it’s not clear why this new fund would massive ramp up investment over its currently depressed levels – if the private sector isn’t funding these projects now, why or how would the fund change this? 

-          The massive injection of money into the banking sector through ECB lending has failed to stir bank lending to such projects and some have cited a lack of viable, risk-appropriate demand for these types of loans. It is possible that the glut of unfunded programmes is not as large as the Commission believes, so this fund would not be addressing the correct problem. 

-          The EU already provides a huge amount of funding, through mechanisms such as the structural funds, which go to similar aims of development and investment. As we recently pointed out these could be spent much more efficiently and have a larger impact. The EU should focus on improving and reforming its current spending plans before trying to create new huge funds with grand aims. 

-          If this fund does come into place there needs to be a rigorous and clearly defined criteria for providing funding, which should be based solely around the ‘growth’ potential or economic benefits of the plan. The EU has fallen short on this front in many other areas of spending.

-          The areas mentioned for providing growth (infrastructure, green energy and high technology) all sound very promising and beneficial but need a carefully differentiated approach (which isn't happening in the structural funds). For example, in many areas (see Spain and Portugal) infrastructure spending has been high for some time but delivered few growth benefits and little more is needed. As the CAP and structural funds show, mixing in scientific and environmental goals with economic objectives can become very messy. Although green energy and promoting new technologies are laudable aims they may not provide the best returns and may not be the most cost effective investments. The singular aim of growth should dictate investments rather than a convoluted over-arching strategy to attack many problems in Europe.

Unless these issues are addressed, we may just end up with another pot of European money being poorly targeted and failing to address a key problem.