How Juncker plans to unleash investment in Europe

25/11/2014

By Peter Spiegel

It has become the central question facing the EU since the acute phase of the eurozone crisis ended more than two years ago: how can governments convince private investors to spend again in Europe’s most troubled economies?

Investment in the EU has plummeted by a stunning €430bn over the past six years, with the eurozone “periphery” – Greece, Ireland, Spain, Portugal and Italy – suffering the most.

The European Central Bank has tried nearly everything in its arsenal to reverse the trend. It has cut its main lending rate to commercial banks to a record low of 0.05 per cent in an attempt to get cheap money into the real economy. Last month it also began purchasing bonds and securities from private investors in an effort to lower the cost of borrowing for European businesses.

Wednesday will be Jean-Claude Juncker’s turn.

The European Commission president’s €315bn “investment plan for Europe” is best understood not as a traditional public works programme, where government spending on infrastructure sparks economic growth. Instead, it is yet another effort to prod private investors from the sidelines and into the EU’s most troubled economies.

In fact, Mr Juncker’s plan, to be unveiled before the European Parliament, calls for no EU money to be spent on new projects at all. Instead, the European Investment Bank and the EU budget will contribute €21bn in guarantees that will allow the EIB to raise new funds in the private capital markets that can then be invested in previously unfunded projects.

EU officials estimate the €21bn will allow the EIB to raise €60bn by issuing new bonds, and that cash can then be invested in projects worth €315bn. Previous schemes such as this, including a €120bn “compact for growth” in 2012, have not worked. Commission officials are convinced this time it will.

The challenge they have to overcome is not size – the EIB is larger than even the World Bank by volume of lending. Rather, it is the bank’s obsession with its own creditworthiness.

One of the EIB’s most important attributes, officials insist, is the ability to raise money cheaply – more cheaply even than many EU governments and most of the public utilities that normally finance infrastructure projects. That ability is tied to the fact its bonds are rated triple A.

If the EIB were to start financing riskier projects in struggling eurozone countries that have suffered investor flight, officials fear it could lose that triple A, something that no big international financial institution has ever done. “It would be uncharted territory,” said one EU official.

Even though the EIB had its capital increased by €10bn in 2012, leaders in struggling countries have complained vociferously that the EIB’s triple A “fetish” meant they put new cash into the bank but received nothing in return; most of the projects, they insist, have gone to healthy economies such as Germany, where the risk is lower.

Mr Juncker is counting on the €21bn in guarantees – €16bn from the EU budget and €5bn from the EIB itself – to get around that problem.

The money will act as “partial risk protection” to EIB lending, offering the bank “first loss protection” if any projects go belly-up. In other words, it will mostly be the EU budget that takes the hit when a project does not go right. That means the EIB’s triple A remains intact even if it begins lending more heavily to projects in Greece or Portugal.

The commission is also taking other steps to ensure that the money does not simply end up in more German infrastructure projects but is used where it is most needed. Instead of again giving new capital directly to the EIB, one of the ideas mooted by Mr Juncker, the €21bn will go into a new entity called the European Fund for Strategic Investments. Although the EIB will still vet all projects for investment worthiness, the EFSI will have its own investment committee to help direct funding.

In addition, an EU “investment task force” has been working behind the scenes on a new list of worthy projects that will be made public in the coming weeks. The projects will have to fall into categories prioritised by Mr Juncker, particularly “strategic infrastructure” like broadband or cross-border energy linkages.

Such projects may one day be a testament to an EU investment plan that succeeded – or another that fell short of political leaders’ expectations.

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