Does Europe need an investment plan?

Roxana Sandu, 05 December 2014

To put it simply, yes. Although high level of financial liquidity exits, Europe suffers of little economic growth. Therefore, there must be the case that there exists a problem of transmission. The question is: does the Junker plan solve it?

Once again the answer  may be yes. The Junker investment plan has 2 main objectives: to increase liquidity and also the number of investment projects. It basically creates an investment plan for Europe with 2 main partners to begin with: the EC (i.e. 16 billion) and EIB (i.e. 5 billion), and aims to set a pipeline for projects and create the right environment for investment. At a later stage,  Member States and additional stakeholders are expected to join in, such as National Promotional Banks, regional authorities and private investors, with the objective of mobilizing by 2017, 315 billion Euro of public and private investments into the real economy.

But 21 billion Euro is quite modest for an investment plan that aims to put Europe on an economic recovery track. And to mobilize 315 billion by 2017 implies that the European Commission president expects a leverage ratio of 15 which is highly optimistic.  But it should not be impossible if it serves  to attract investors. Confidence is the key factor and by investing public funds, this may be a guarantee. In any case, if there is a shortage of capital, it is on the risk side! Do we have enough risk capital? That is the question. Well, in order to ensure increased access to risk financing and  offer risk support for long-term investments, a new European Fund for Strategic Investments  will be established within the EIB.

Graph 1

Source: EC, 2014

The objective of the fund is to support SMEs (e.g. start-up equity, micro-loans) and mid-cap companies (e.g. loans for R&D projects, venture capital for prototypes) as well as financing long-term investment in infrastructure (e.g. transport, broadband, energy), education, innovation, research, energy and resource efficiency and renewable energy as well as long-term investment funds. It is expected that the fund could reach an overall multiplier effect of 1:15 in real investments.

Graph2

Source: EC, 2014

The main problem is that Europe still does not inspire confidence in order to invest on the long term because the fiscal and financial frameworks are not stable. To start with, a multiplying effect may be built if one ensures own consumers and investors first. Furthermore, national investments are needed together with European ones. Large national, European and cross-border projects need to be developed on the longer term that would create jobs and would address unemployment. But at country level, risk aversion is high and little commitment exists for large infrastructure projects as yet. Certainly legislation needs to facilitate investments and red tape has to be reduced. Structural reforms are also needed; surely the process may not be that simple and it may require some time, but could facilitate investments and economic growth on the long-run.

All in all, the Junker investment plan remains very general, with funds reallocated from different programs and high expectations, but the point remains that it should not be impossible if it is implemented efficiently. To do just that,  political will needs to be in the right place and all actors need to do their part at either national or European level, if we want results.

As well as an young artist brings sparkles in the eyes of teenage girls with his song, so does the Junker investment plan for our Europe: “If you believe… no need to worry there’s no doubt!”

 

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s