European Commission President José Manuel Barroso pledged yesterday (14 December) he would "insist" on tabling plans to introduce EU project bonds to fund infrastructure in Europe, as an alternative to the controversial idea of eurobonds.
Speaking at a European Parliament plenary session in Strasbourg, Barroso supported the idea of "project bonds" as a new source of finance for major EU investments, dismissing an alternative plan for eurobonds, recently relaunched by a joint initiative from Eurogroup President Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti.
Barroso told MEPs that the idea of eurobonds was "interesting", but also repeatedly underlined that "at the moment there is no chance to have an agreement" on this issue, which is likely to "divide" the EU if it were pursued further by its supporters.
Indeed, Germany and France reiterated their stance against eurobonds in their last bilateral summit on 10 December in Freiburg, ahead of the European Council on 16/17 December.
Are project bonds the way forward?
Member states would need eurobonds to collect money on the markets. This would allow them to finance major infrastructure projects aimed at modernising Europe, while creating new jobs and boosting economic growth.
EU project bonds could reach the same objective of funding key projects, but in a different way, which is likely to have no immediate impact on national budgets.
Major infrastructure projects, such as railways or pipelines, need a complex mix of capital to get off the ground. The promoters of a project usually invest their own money, use bank loans and issue bonds to raise sufficient financial resources.
In a period of risk adversity and low financial activity, fewer investors are keen to buy bonds issued to finance major infrastructure projects, like the Trans-European Networks.
To address the lack of risk-takers, the European Investment Bank (EIB), the financial arm of the European Union, could replace private investors and buy bonds itself. This is indeed what Barroso refers to as project bonds.
The EIB could even "provide higher-risk subordinated debt finance," said EIB President Philippe Maystadt.
By doing so, the EIB would buy the riskiest bonds: those with the highest possibility of not being reimbursed if the project fails.
"The participation of the EIB in a given project would act as a guarantee for other private investors, ensuring the right level of liquidity for a long-term project," explained an EIB official. This would also reduce dependence on bank capital, which is much more difficult to obtain in this economic phase.
The EIB is already buying project bonds in small amounts, as described yesterday by one of its vice- presidents, Dario Scannapieco, in Italian newspaper 'Il Sole 24 Ore'.
Two photovoltaic projects in Italy have been financed through EU project bonds, underlined Scannapieco.
The idea flagged by Barroso, however, implies large-scale use of project bonds. "The EIB would not need an increase of its capital in the short-term to buy project bonds, but clearly if applied at a larger scale, extra capital might be necessary," said an EIB official. The EIB is funded by member states.
Barroso referred to project bonds as early as his State of the Union speech in September. "I will propose the establishment of EU project bonds, together with the European Investment Bank," he said back then.
In his speech yesterday he reiterated his commitment but warned that "a few states have already shown criticism". The European Council scheduled for this week might be an occasion to informally address the issue, which is not included at the moment in the light agenda of the summit.
The European Parliament instead showed support for project bonds. Gianni Pittella, the first vice-president of the assembly and a member of the Socialists & Democrats group, the opposite political camp to Barroso's European People's Party, said the plan would be "a valuable option to bring fresh money to key EU projects, which otherwise risk drying out of funds".