EIB role in Juncker investment package draws more questions than answers for now
Bankwatch Mail | 2 December 2014
Here we go again. Having been called upon to ramp up its investments in 2009 and 2010 as part of Europe’s initial financial crisis fire-fighting, and then in 2012 been a central cog in the EU’s ambitious but ultimately lacklustre ‘Growth Compact’, the European Investment Bank now finds itself at the heart of new European Commission president Jean-Claude Juncker’s three-year drive to boost investment in Europe, as unveiled on November 26.
This article is from Issue 61 of our quarterly newsletter Bankwatch Mail
The Juncker package, aiming to trigger EUR 315 billion over the next three years for infrastructure projects and small enterprises, provoked widespread scepticism in the lead up to its launch, with critics and the European press flagging up the ‘financial engineering’ that underpins the EU executive’s latest efforts to address the EU’s stagnant investment climate and boost growth. One notable headline referred to Juncker’s ‘New Deal’ as a ‘subprime gimmick’.
The Juncker package has, though, cleared its first hurdle, with most members of the European Parliament endorsing it during a parliamentary session that saw EIB president Werner Hoyer join Juncker to outline the plan and field questions about its workings and its feasibility. Endorsement for the Investment Plan for Europe from the European Council will be sought next month. At this stage in the process, however, many are far from convinced.
Philippe Lamberts, co-president of the Greens/EFA grouping, was scathing in his assessment:
“In terms of ambition, the headline EUR 315 billion sum is clearly wishful thinking. The plan relies on wildly unrealistic projections on the ability to leverage private investment; it is hampered by the low level of public investment and doubts as regards whether many of the funds are fresh or merely recycled existing commitments. Reallocating EUR 21 billion of already committed funds will not mobilise EUR 315 billion: a leverage effect of 15 is not serious.”
Juncker investment package shifts risk from private investors to EU taxpayers
Press release | November 26, 2014
The NGO coalition Counter Balance voiced a wider concern that the Juncker investment package shifts risk from private investors to EU taxpayers, with the group’s director Xavier Sol commenting:
“The EU debt crisis was the consequence of an unfair risk-reward balance. Big banks took the profit while the risks were borne by taxpayers. Instead of rebalancing this injustice, Juncker’s package seeks to generalise this principle throughout the entire economy.”
Pressed by journalists on the related point of how he could back a plan stuffed with ‘casino capitalism’ features responsible for the financial crisis in the first place, European Parliament chief Martin Schulz insisted cursorily that “we need this” because it will relaunch the European economy.
Looking under the bonnet of this latest high profile EU stimulus plan (Juncker himself described to MEPs how “Europe needs a kickstart, and today the Commission is providing the jump cable”), it’s not difficult to see why it has split opinion so widely among politicians, bankers, analysts and civil society across the continent – and not simply because the key presence once again of the EIB fails to inspire confidence, based on its patchy post-crisis performance to date.
Timetabled to be operational by mid-2015, the Commission plan rests on the setting-up of the European Fund for Strategic Investment (EFSI). The financing foreseen piles one layer of financial engineering on another.
A basic pot of EUR 21 billion is to be organised, with EUR 16 billion to be covered by EU member states (effectively from already allocated public EU budget money) and EUR 5 billion to come from the EIB. Via the issuing of new bonds, the EIB is expected to be able to then raise EUR 60 billion in the private capital markets. From this vantage point, it is being assumed that projects worth a total of EUR 315 billion will then be realisable, with primarily private investors expected to jump at investment opportunities across Europe.
The starting point sum of EUR 21 billion in guarantees is seen as crucial. And as the Financial Times points out, “it will be mostly the EU budget that takes the hit when a project does not go right.”
Of the controversial 1:15 leverage ratio, Societe Generale provided sobering commentary, noting that
“similar infrastructure financing in the past had much lower leverage ratios. For instance, according to a recent [November 2014] Moody’s research paper, the leverage ratio for the Project Bonds Initiative launched in 2012 ranged from 5 to a maximum of 7. As these projects were of relatively good quality (rated Baa3 to Ba1), even lower leverage should be expected for riskier projects – which should be the case of many EFSI projects as the majority of them are expected to be in the South of Europe.”
Beyond their riskiness, and as to what kinds of projects will emerge within the next three years, German Chancellor Angela Merkel has given the Juncker plan her blessing “in principle”, while stressing to the German parliament that “investments are important, but that it has to be clear above all where the projects of the future lie.”
Philippe Lamberts also warned about the “direction of the investments”, and emphasised the need for the plan “to create a green energy union based on energy efficiency and renewable energy, to reorient our economy and to stimulate social and green innovation. It should be used to address social exclusion and poverty and empower all citizens to play a dignified role in our society.”
E3G and other energy groups urged the Juncker Commission to prioritise “demand-side flexibility, smart distribution grids and energy efficiency” within the EUR 315 billion investment package in order “to bolster jobs, growth and investment in Europe, and to build a resilient Energy Union with forward-looking climate policy.”
The official line so far on project selection and criteria is of course positive but vague. EFSI will target “viable projects, with a real added value for the European social market economy”, including the following project types:
- Strategic infrastructure (digital and energy investments in line with EU policies).
- Transport infrastructure in industrial centres, education, research and innovation.
- Investments boosting employment, in particular through SME funding and measures for youth employment.
- Environmentally sustainable projects (renewables and energy efficiency).
- Innovation and Research & Development.
Overseeing investment choices will be an ‘independent investment committee’ set up to scrutinise projects submitted by EU member states, with other related in-house advisory infrastructure (including a ‘Hub’) forming part of the new ESFI.
Where the boundary lines between the ESFI and the EIB itself start and end remains difficult to fathom at this early stage. However, according to a ‘senior official’ quoted in The Guardian: “Effectively we’re building a new EIB within the EIB.” This sentiment should in itself trigger alarm bells amongst European decision-makers alert to some of the institutional frailties that have dogged the EIB for decades, including the lack of transparency and accountability that prevails over its investment decision-making.
Very early days, then, for the Juncker plan and the fledgling ESFI being put forward to breathe life into the EU economy. German commentator Barbara Wesel strained to emphasise the plan’s positives, describing it as “a big, nicely packed box which contains a few balls of wool along with a note saying they can be knitted into a lovely scarf.”
However, as typified by a tweet from Stanley Pignal, banking editor for The Economist magazine, expectations remain lukewarm – at best – for now.
After ESM, EFSF, PSI, EFSM, OMT, LTRO, TLTRO and maybe QE, we now have EFSI. That ought to do it.
— Stanley Pignal (@spignal) November 26, 2014