This week, Brussels’ bubble was abuzz, recovering from discussions over Jean-Claude Juncker's investment plan. Although we welcome the Commission’s philosophical change on investment, we wonder if the plan can really change the macro-economic situation. The package presented in Strasbourg last week builds on the creation of a new European investment fund, together with some sort of governing body to identify viable projects. It is based on €21bn of already existing EU money, including €5bn guarantees from the EIB, which, altogether, would leverage up to €300bn of venture capital and private funds, according to Commission.
Kick-starting Europe’s economy
Why do we need an investment plan? Simply because weak investment has an impact on capital stock, which in turn restrains Europe’s ability to deliver growth and jobs. Since the beginning of the economic downturn, Europe's total investments decreased around 15%. Access to finance has also become extremely difficult, especially for riskier long-term investment projects. The Commission expects investments rates to take off by taking part of the risk in order to reassure private investors. Member States already sent their Christmas lists to Brussels, and projects currently on the table are mostly infrastructure-related in sectors such as transport, energy or ICT.
Misinterpreting the real issues
While all business operators welcome the Commission’s new philosophy, industry remains sceptical. First, how can Europe stimulate new momentum with almost no new money? The €300bn figure looks quite fictitious, with an estimated multiplier effect of 15! Second, how will governments channel money towards viable projects? Here the governance aspect is crucial, especially to minimise deadweight effects. But nothing has been clarified in great detail so far. Even MEPs today do not have the slightest clue how the Commission wishes to handle this. Third, and that is the most important aspect, most industry operators consider that the issue of investment in Europe comes from a lack of viable projects, not from a liquidity drain. EU efforts should, therefore, focus on developing project management support in Member States, which are not clear and efficient enough. If no investment project with clear EU added value emerges, what would the money be used for?
Clear political gain
However, the political gain for Jean-Claude Juncker is obvious. By triggering the issue of investment at the beginning of his mandate, the Luxemburg Commission President shows with this plan the change in the EU’s economic approach and can claim two political victories. First vis-à-vis Germany, which has always been reluctant about injecting EU money, as it worries that this would be a first step towards Eurobonds or a fiscal union. The investment plan demonstrates that Juncker is not Angela Merkel's "muppet" as some like to suggest. It's also a coup vis-à-vis EU citizens, who for the first time since many years hear something different than fiscal discipline and budgetary constraints from Brussels.
As former US President Bill Clinton once famously said to suggest the overbearing weight of economic realities on politics, "It's the economy stupid!" Today, however, Juncker might say "It's the investments, stupid!", as for Europe, investing in the future, i.e. in tomorrow’s growth, is key.