Juncker pins hopes on plan to leverage private investment

Less than a month after assuming the helm at the European Commission, Jean-Claude Juncker has unveiled his much awaited investment plan for Europe. Mired in controversy over the Lux leaks scandal, the former Luxembourg prime minister has decided to announce his flagship plan earlier than had been expected, which can be seen as an attempt by him to deflect attention from the controversy.

But while it may serve to take the heat off the Commission president – Juncker has survived a no-confidence motion in his leadership in the parliament – the real question is whether the plan will revitalise the moribund European, and particularly euro zone, economy. With Britain and the US leaving the memory of the financial crisis behind them as their economies steam ahead, the euro zone economy is struggling to grow in the wake of the sovereign debt crisis.

Growth in the third quarter was up slightly at 0.6 per cent on a year-on-year basis, but still remains well below pre-crisis levels, while inflation remains worryingly low at 0.4 per cent. Unemployment is still persistently high, with lending weak.

The Juncker plan aims to address these challenges by tilting the EU’s economic policy focus towards investment, rather than austerity, the EU’s dominant economic narrative during the financial crisis. While the Juncker plan can therefore be seen as an attempt by the new Commission to distance itself from the policies of the Barroso era, Juncker cautioned against viewing the investment plan as a magic solution to Europe’s economic woes, emphasising that structural reforms still needed to be maintained. Instead the investment plan should be seen as a “third lung” in the European Union’s economic policy, which together with structural reforms and budget consolidation, would help to encourage public and private investment in Europe, he said.

No

new money The real question, however, is whether the investment plan will work. Critics were quick to point out that the €315 billion comprises merely a €21 billion fund, comprising €16 billion of EU guarantees and a €5 billion equity injection from the European Investment Bank. There is no "new" money – the €8 billion backstop underpinning the guarantees is drawn from already agreed EU budget sources, including from the EU's research and innovation programme Horizon 2020, and the Connecting Europe Facility.

But EU officials stress that the whole point of the package is to leverage private investment, rather than plough in fresh EU money or increase public debt levels.

In this regard, the scale of investor buy-in will be crucial to the success of the Juncker investment plan, as the EU tries to entice the investment community into the EU story. The Commission's vice-president for economic affairs, Jyrki Katainen, recalled a recent conversation with investors in the City of London who called for coherent investment projects in which they could invest.

Liquidity is not the problem, officials say, but rather the challenge is how to tap into this liquidity. Katainen’s intention to undertake investor roadshow- type trips across member states is a novel idea, and perhaps a positive sign that the new European Commission is prepared to engage with the financial world.

The new fund also plans to differentiate itself from the European Investment Bank which, with an eye to its Triple A rating, has tended to focus on low- risk projects. In contrast, the European Fund for Strategic Investment (EFSI) as it is known, will invest in the riskier tranches of projects, such as equity and subordinated debt. The EU’s adoption of the “first loss” principle is also expected to encourage investors.

Time frame

The other main challenge for the proposal is the time frame. With the fund not expected to be up and running until the middle of next year, there is a danger that the projects could be delayed. The Commission has said it will provide investors with a clear pipeline of projects, with a list published online. And governments have been charged with coming up with a list. A special investment advisory “hub” is being established with the aim of bringing investors and projects together through one single point of contact.

While EIB president Werner Hoyer said that a leverage ratio of 15 was a conservative estimate, some in the investment community believe this is too ambitious. Barclays notes that the project is constrained by a lack of public money, and believes it will have a limited impact on the overall macroeconomic situation of the EU, though welcomed the announcement as a step in the right direction.

With the Commission estimating that the plan could add between €330 and €410 billion to the EU's gdp, and create up to 1.3 million jobs over three years, the Juncker Commission will be hoping its flagship investment plan will attract the private investment it badly needs in order to succeed.