New EU investment plan based on shaky foundations
The EU Commission is to present concrete proposals on the European Fund for Strategic Investments (EFSI) by January, after EU heads of states and governments leaders endorsed the new investment program. The EFSI is to be launched with 21 billion euros of EU money and is intended to attract 15 times more private capital for financing investment projects. The EFSI is scheduled to take up operations by June.
Yet, the foundations of the EU investment project seem shaky. The starting point of the Commission’s investment plan is the assumption of an “investment gap” in Europe. However, there is no such thing as an “optimal investment ratio”. Given many unknown factors and interdependencies and due to large differences between member states in terms of economic maturity or structure, calculating “investment gaps” is pretending to be in possession of knowledge which is simply not available.
Moreover, net private investment cannot said to be low in all member states of the Eurozone. In a number of member states investment levels have been unsustainably high in the past, causing high indebtedness, which now has to be painfully corrected. Falling net public investment, thus, mirrors current public budget constraints.
European policy makers should at least attempt to limit potential losses to 21 billion euros by paying special attention to the use of EFSI guarantees. However, there is only one way to avoid EFSI losses affecting member states’ budgets under any scenario: The EIB should issue bonds with a contract clause entailing that creditors will be serviced only as long as EFSI losses do not exceed 21 billion euros.
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Dr. Bert Van Roosebeke (Head of Department), Ariane Kiesow, Department for Financial Markets