Jean-Claude Juncker received approval for his long-awaited investment plan at the European Council meeting on 18 December 2014, giving more details and clarifying some of the open questions on 13 January 2015. Forecasting at least €315bn additional investment over the three years 2015-2017, it was billed as the central plank in his determined effort to spend five years saving Europe, alongside member states’ ‘commitment to intensifying structural reforms and to pursuing growth-friendly fiscal consolidation’.
The commitment to investment represents a noble effort to start reviving the European economy with the very limited resources allowed by current political constraints. It will lead to some more investment, but it suffers from serious shortcomings, meaning that the investment will be limited in volume and biased towards the countries that need EU help the least.
A proposal for a credible European investment plan needs to answer a number of questions. It needs to explain why investment is necessary and where it should be directed, why it has not been happening already, how it will be financed, what governance structures will be created, what other measures might be needed to make it effective and why such a programme should be directed from the European level.
The first of these receives the most convincing answer. A so-called Special Task Force, with representatives of member states, the Commission and the European Investment Bank (EIB), argued in its final report in December 2014 that investment had fallen 15% below its pre-crisis peak with far greater declines in some countries. Juncker’s plan would cover about one fifth of that gap over its three years.
In general, investment would provide a short-term stimulus. It is also needed to overcome the wide divergences in economic and social levels across EU member states and to help meet the long-term need in all countries for infrastructure, facilities for education, training and research, innovation and new technologies, energy transformation, urban renewal and social services. These are largely typical public sector activities and the public sector should be expected to be involved in, if not lead, much of the investment. Member state governments were immediately able to identify 2000 projects awaiting implementation with a cost of €1300bn, of which € 500bn would come in the next three years.
To explain why this investment has not been forthcoming, the Task Force pointed to ‘a wide array of barriers and bottlenecks’, justifying a similarly wide array of policies, including reducing regulation, completing the single market and continuing with ‘structural reform’. This latter term has frequently been used to mean policies to reduce employment protection, the scope of collective bargaining and ultimately wages, but there is no basis in the Task Force’s analysis for expecting such measures to contribute to higher investment. Rather, the key constraints on private investment are recognised at various points in the Task Force report as ‘low demand growth’ . This is not a matter of a lack of confidence in general, but a lack of confidence reflecting an accurate perception of reality. Demand is low and there is therefore every reason to hold back on investment, as also confirmed by the European Commission`s Business Surveys. Where bank lending is constrained, the key factor is usually also low demand and poor business prospects leading to doubts over the safety of lending.
The barriers to public sector investment are detailed within the Task Force report on projects that are ready to be started. Of 46 they selected as illustrative from the full list of 2000, finance appears explicitly as the key barrier in all but three. For some, the barrier was a lack of long-term finance, for some it was the effects of Eurozone budget rules and the cuts that have been imposed while for others it was the unattractiveness of the projects to private lenders. Regulatory issues appear even in a secondary role very rarely.
Financing is to depend on a fund, the European Fund for Strategic Investment (EFSI) with a starting value of €21bn; of this €5bn will come from the EIB and the remainder will be a guarantee from the European Commission. This will then be used to guarantee, in turn, credits from private sector long-term investors to favoured projects reaching the value of € 315bn, fifteen times the original commitment. It is hoped that the initial sum will be increased by contributions from member state governments.
This part of the plan suffers from the following weaknesses:
– the high leverage rate is derived from estimates of what has been achieved in the past from the most secure long-term investments. It does not reflect the position in countries in the greatest difficulty. The total investment will therefore either be strongly focused on countries in the least difficulty or fall well below the target level.
– member states are expected to commit extra resources to the EFSI out of a general desire to help EU economic recovery without any promise of return or any direct ability to influence investment decisions. A small number of governments (Spain, Finland, Slovakia) came forward quickly to say that they would be willing to contribute, but action is yet to be seen. The initial funding of €21bn is therefore unlikely to increase much, if at all.
– repayment for public sector projects will be especially difficult for countries constrained by Eurozone debt rules. The solution proposed is ‘an increased adoption of the user-pays principle’. The implication is that investment will be biased towards projects offering quick financial returns and towards countries facing the least budget difficulties, with very little on offer to public sector projects elsewhere.
The proposed governance structures threaten to exacerbate the weaknesses of the proposed financing mechanism. Decisions are to be taken by an Investment Committee of the EFSI made up of ‘independent market experts’. The EFSI will create a ‘pipeline’ of investment projects judged adequate to guarantee, with selection based on certainty of returns and without reference to any geographical or sectoral priorities.
Private sector investment funds have particularly welcomed the fact that they expect to be able to choose the projects they lend to, meaning that they can avoid countries they consider, or they fear their depositors may consider, risky. The bias is therefore likely to be towards those countries with the largest supplies of long-term lending resources, meaning the most wealthy – and those with the most extensive finance sectors.
The emphasis in accompanying measures is on ‘structural reforms’ and maintaining existing rules on budget deficits and public debt levels. This makes financing public sector projects extremely difficult. It also raises questions over their usefulness: there is, for example, little point in building and equipping new schools and research facilities if there is no funding to run them once completed. In a small concession towards reducing the effects of austerity in the Juncker proposal, member states that contribute to the EFSI will not be penalised for a resulting small and temporary breach of the Stability and Growth Pact.
The continuing emphasis on ‘structural reforms’, when this is partly a euphemism for reducing employment protection and pay levels and for limiting the scope for collective bargaining, should also be judged counter-productive. Cutting wages has contributed in a number of countries to lower demand, without obvious positive effects in raising exports. Cutting wages can also nullify the positive effects of investment in areas which need to attract and retain qualified employees.
A final remarkable feature of the Juncker plan is that there is no obvious argument for such a programme to be run from the European level. There are some cross-border projects, but they are a small part of the total. For the most part, the same effect could be achieved from programmes run separately in individual countries. Countries and businesses will have no new access to finance beyond what could be financed from their own budgets – were there to be a slight relaxation in budgetary rules.
Thus, a reasonable forecast is that the Juncker plan will lead to some increase in investment in EU ‘core’ countries. It is not the magic bullet that will revive the EU economy. To achieve more would require dropping the strict insistence on the core elements of austerity and developing a more substantial and better-funded investment plan. The current proposal ignores the great potential strength of a plan run from the EU level. A EU fund, or institution such as the EIB, if adequately capitalised, could raise substantial finance at very low rates of interest and use it to finance investment across the EU, above all in countries in the greatest difficulty. That would require overcoming the political barriers that restrict the availability of finance for starting such a project. Without that, the EU economy faces the prospect of continued stagnation.