28.05.15

EU investment plan solves none of the real problems

Of much greater importance than the promotion of investment using public funds would be to ensure a stable and predictable regulatory framework in conjunction with the reduction of obstacles to investment

A deal struck by MEPs and Council of Ministers negotiators on Thursday means the architecture of the Juncker plan to unlock 315 billion euros public and private investments can now be put to a European Parliament vote on 24 June. Parliament’s negotiators scaled back cuts in the EU’s “Horizon2020” research and innovation program and Connecting Europe Facility.

Presented last November, the Juncker Plan aims to create a European Fund for Strategic Investments (EFSI) made up of 5 billion euros capital and a 16-billion euros guarantee fund. Yet, the EU approach on the matter is fundamentally flawed. The investment plan solves none of the real problems which stand in the way of higher net investment. To the contrary, the plan involves a significant risk of a misallocation of resources.

Net investment has been falling in most countries in the EU for several years. Firstly, this is due, particularly in the Eurozone, to falling net public investment - a direct consequence of the precarious budgetary situation of many Member States - and secondly, also to dwindling net private investment in a number of countries.

Three problems, which vary in degree in the affected countries, are responsible for this: firstly, the need to scale down excessive levels of private debt; secondly, the erosion of competitiveness in the economies concerned, making many investments unprofitable; and thirdly, the necessity for many banks to reduce their lending because, due to the required balance sheet restructuring and stricter regulation, they lack the necessary equity. This limits the investment capability of companies.

The investment plan solves none of these problems. Brussels is presuming to know the "optimum investment quota" for the EU and thereby claims to have knowledge which is not available.

The investment plan involves a significant risk of a misallocation of resources because the EU investment guarantee may result in lenders contributing to projects which have not previously been financed because without a guarantee or other public support, they are unprofitable. Conversely, the EU guarantee could suppress other profitable investments which lenders would otherwise have undertaken. To the extent that this leads to deficits, the European tax payer will bear the loss by way of the EU guarantee.

Of much greater importance than the promotion of investment using public funds would be to implement the third pillar of the investment plan: to ensure a stable and predictable regulatory framework in conjunction with the reduction of obstacles to investment. If lenders fear changes in the rules and a resulting devaluation of investments, there will be no investment.

Philipp Eckhardt, Financial Market Division, eckhardt(at)cep.eu