Juncker investment package shifts risk from private investors to EU taxpayers

InvestEU programme endorses unfair risk-reward balance
Risky projects may threaten economic development instead of driving it

Brussels – Today European Commission president Jean-Claude Juncker will present his widely anticipated 300 billion euro investment package aimed at stimulating growth in the European economy. Central to the InvestEU programme is a 21 billion euro allocation for the newly-created Euopean Fund for Strategic Investment (EFSI) that has to leverage 315 billion euro from private investors, or 15 times the amount of the fund.

In the run up to today’s announcement, President Juncker’s growth plan has attracted widespread scepticism from analysts who doubt it can address Europe’s post-crisis investment woes. Big investment talk based on a leverage ratio of 15 to 1 is optimistic to say the least, if not irresponsible.

Against this backdrop, the European Commission’s passive approach to economic recovery is concerning. In order to attract private investors the fund will only be used to ‘de-risk’ investments in risky projects that face difficulties attracting capital.

De-risking does not mean risk disappears, but rather that risk is passed on to public institutions and EU taxpayers.

“What looks at first sight like a big, new silver bullet to finance large infrastructure projects could very easily end up having a devastating effect on Member State budgets and the economy if the projects fail,” said Xavier Sol, Counter Balance director. “Instead of blindly cheering a new source of cheap money we should be a bit more careful in assessing the solidity of this scheme and the clear risks that accompany it.”

The details of the financial instruments required to realise the European Commission’s latest investment ambitions have not yet been made public but they are expected to include the provision of high-risk capital for infrastructure projects in order to attract private financing, similar to the EU’s Project Bonds Initiative (PBI). Launched in recent years by the European Commission and the European Investment Bank (EIB), PBI is being used to refinance risky infrastructure projects via capital markets. The EIB’s role is to de-risk these projects by upgrading their credit rating and taking the first losses if needed.

The Castor gas storage facility in Spain, the first project to be financed via the PBI, has already proved to be disastrous, and instead of spurring growth, the controversial project has placed an additional debt burden on the Spanish economy. Ultimately this debt will be passed on to Spanish citizens who will be repaying bondholders over the next 20 years through increased gas bills.

Xavier Sol: “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.”

Markus Trilling: “Juncker’s package may be favourable to big investors in large infrastructure, including potential white elephant projects that will receive guarantee returns on risk free investments. The effects for Europe’s economies, though, are far less clear and may even be negative as seen recently in the Spanish Castor project.”

Notes for the editors:

– The EU Project Bonds Initiative analyzed: http://www.counter-balance.org/what-perspectives-for-the-project-bonds-initiative/

– More on the Castor Project: http://www.counter-balance.org/first-eu-project-bonds-fail-and-will-cost-spain-eur-14-billion/

– On 2 December a roundtable will be organized on in the European Parliament: ‘The European Project bonds – What impact on EU public finance and what vision for the future’

– Counter Balance commented earlier on the investment package: “A €300 billion growth package: don’t just spend it, spend it wisely” (Euractiv) – http://www.euractiv.com/sections/eu-priorities-2020/eu300-billion-growth-package-dont-just-spend-it-spend-it-wisely-309136