At this week’s Summit, EU leaders are expected to endorse the Investment Plan proposed by the European Commission on 26 November, which aims to deliver at least €315 billion of additional investments at EU level over the next three years. At the heart of the plan is €21 billion of EU funding, with the aim of leveraging this up through the European Investment Bank (EIB) and the private sector by a combined factor of 15 (i.e. €1 of EU money generates €15 of investment). There is some speculation that Member States will further add to the pot at the Summit, which could take the total intended impact to around half a trillion, with a pipeline of priority investments already being determined by an EU Taskforce, made up by the Commission and the EIB, together with Member States.
Beyond funding and a project pipeline, there is also a third pillar – EU-level structural reforms. Here, there seems to be high aspirations but little in terms of concrete measures. True, the new Commission has committed strongly to some of these reforms: better regulation, an Energy Union and a Digital Single Market. But it remains to be seen how able the new Commission will be to overcome the long standing barriers, including strong vested interests in the Member States.
Remaining questions
The numbers in the Investment Plan sound impressive, but many questions remain: Is the scale enough? This investment boost might be closer to the annual shortfall in investment rather than closing the cumulative gap of the next three years. Will Member States add substantive national funds? Can you deliver European public goods without more substantial public investment? Can this leverage level be achieved? At the very least it will require the EU taking additional risks, and so far the EU project bonds pilot, which applies a similar principle, has been less than convincing.
Even if the money is there, there also need to be a sufficient pipeline of medium risk projects that are ‘shovel-ready’ in the coming three years and the Taskforce must have the capacity and full information to select the right projects. Member States have shown in the past that they can push for (ineffective) national prestige projects and fight for a ‘juste retour’ of EU funds to their own economy, which does not help those economies most in trouble.
There are also questions about the additionality: Member States will propose some projects which they were going to fund anyway or which were already being funded at EU level. In addition, some of the money allocated to the new European Fund for Strategic Investments (EFSI) comes from EU funding already dedicated to growth, which not only raises the question of whether this new vehicle can add sufficient additional value but also why it is necessary to rededicate money from the EU budget to jobs and growth, as this was the supposed ‘Leitmotiv’ for the new funding period.
A starting point…
But the Investment Plan goes in the right direction. If designed right, the leverage will provide a much bigger ‘bang for the buck’. Using limited public funds to boost private investment by providing a form of public insurance[1] is worthwhile in a situation where fiscal constraints remain binding in many countries, and where the EU level is unable to raise additional funds for investment. Even if the leverage is not fully achieved and some of the projects are not additional, it will produce a certain amount of additional private investment, which is desperately needed. There is also some scope to increase the funding available if it can be shown that there are sufficient ‘bankable’ projects in which the money can be invested. The Investment Plan might also create momentum for EU-level structural reforms.
… but not the full answer
This is how the Investment Plan should be seen: as a first step in a series of policy initiatives aimed at boosting Europe’s economy, as proposed in the EPC’s ‘New Deal’ for the euro.[2] In addition to the EFSI, a project pipeline and ambitious structural reform at EU level, there should be at least another five core elements:
- Reform of the fiscal/EMU governance framework to ensure that national productive public investment, for example in infrastructure, or social investment (such as education) is treated separately in the fiscal rules and that such investment is promoted through the European Semester.
- The establishment of a fiscal capacity to mitigate asymmetric macroeconomic shocks which helps countries with severely limited fiscal space to support such investments.
- A boost of public investment at national and at EU level (potentially financed through bonds) to take advantage of low interest rates to finance projects/programmes without private sector interest.
- A reform of the EU budget, for example as part of the review of Europe 2020 in 2015, to refocus the budget on providing more of the public and social investments some Member States are unable to make themselves, for example in areas such as childcare, health and education.
- Real structural reform at national level across the EU, not simply aiming to cut public expenditure but to boost jobs and growth in the long run, for example through shifting tax burdens away from labour or by reforming training and education to achieve a better fit with labour market needs. To alleviate fears of reform inaction, governance changes and additional funding could be made conditional on making progress on such reforms.
Member States will not move further for now
Without further joint action, the Union faces long term stagnation, further undermining the EU’s credibility and political stability. Given its limitations the Investment Plan can only be the first step in an ambitious approach to tackle this challenge. But the common feature of the further actions noted above is that, politically, they require Member State buy-in, consensus and, above all, trust in each other and the institutions – which are still lacking
There is a need for a ‘Grand Bargain’, which manages to combine governance change and further support with a demonstrable willingness to carry out reforms and long term political commitment; a more competitive EU which can also deliver social priorities. Without such a shared strategic direction, the Investment Plan will remain an isolated element, used as a fig leaf for Member States to not do more. Europe’s economic and political decline will not be halted by this Investment Plan alone, regardless of how useful it is and how loudly the Summit will praise it.
Fabian Zuleeg is Chief Executive of the European Policy Centre (EPC).
Disclaimer: The views expressed in this Commentary are the sole responsibility of the author.
[1] As proposed by the EPC: http://www.epc.eu/documents/uploads/pub_3400_squaring_the_circle_%E2%80%93_a_european_investment_guarantee_scheme_%28eigs%29.pdf
[2] See: http://www.epc.eu/documents/uploads/pub_1277_a_new_deal_to_help_save_the_euro.pdf