Question marks over €120 billion EU ‘growth pact’

EIB building.jpg

EU heads of state agreed a "European Growth Pact" worth €120 billion at a summit in Brussels, which closed on Friday (29 June). But doubts have been raised about how fresh the money will really be as at least half of the sums will be recycled from existing regional policy funds. EURACTIV France reports.

European Council President Herman Van Rompuy announced Thursday evening (28 June) that EU leaders had approved a so-called growth compact, which he said would mobilise €120 billion in "immediate measures."

The measures, already approved in principle a week ago by the leaders of France, Germany, Spain and Italy, include increasing the European Investment Bank's capital, redirecting unspent EU regional aid funds and launching project bonds to co-finance major public investment programmes. 

Danish Prime Minister Helle Thorning-Schmidt called the pact "a light in the dark", saying it will "give hope to the Europeans that we are capable of taking decisions that will create growth."

The €120 billion figure is broken down as follows:

  • First, the European Investment Bank (EIB) will see its capital increased by €10 billion, which will expand the bank's overall lending capacity by €60 billion. The capital increase comes with a pledge to make sure EIB loans reach “the most vulnerable countries,” Van Rompuy said.
  • Leaders also decided that unused structural funds (€55 billion) will be reallocated to measures for small and medium-sized enterprises and youth employment.
  • Finally, a pilot phase for new project bonds (€5 billion) will be launched this summer for initiatives in energy, transport and broad-band infrastructure.

Doubts raised over EIB project timescale

However, doubts have been raised as to whether the sums can be mobilised and fast-tracked to boost economic growth in the short term.

Raising the EIB's capital will need backing from EU member states in order to enable the initial €10 billion sum to be leveraged to €60 billion.

Should the leverage work, public guarantees of some €200 million coming from the structural funds will be backed by projects funded up to €4.5 billion through bonds issued by the companies which decide to participate in the projects.

Identifying the project partners and putting in place the financing structure often takes years, making it unlikely that they will come off the ground any time soon.

“Infrastructure takes years, sometimes five years. These are not measures that boost activity immediately,” Florence Pisani, an economist at Franco-Belgian financial institution Dexia Asset Management, told EURACTIV France.

Regional funds have 'microscopic' effect on Greek economy

Regarding structural funds for regional development, other questions are being raised as to their effectiveness, especially in Greece.

According to Marc Lemaitre, head of cabinet for the budget commissioner Janusz Lewandowski, their impact is “microscopic. ”

“Greece is in deep recession with an annual contraction rate of 6% to 7%,” he told EURACTIV France. “But the structural funds represent 1.5% to 2% of Greek GDP and the country must reduce its spending by 3% to 5% per year. It is these elements that dominate and we perceive very few beneficial effects from injections of that lower order.”

In fact, much of their effect will depend on the quality of projects funded.

“When the EU says go and build infrastructure to an stimulate your growth, Greek politicians, because they are corrupt and stupid, build swimming pools and local recreation centres,”  Nicholas Georgakopoulos, a Greek professor at the University of Indiana’s law department, told US radio network NPR.

?The Greens/EFA group deemed proposals aimed at stimulating economic growth as unconvincing"While we urgently need to move beyond the narrow austerity focus, the 'growth compact' lacks any credibility. The overall amount is a drop in the ocean. Worse, it is reliant on the recycling of existing funds and fairytale assumptions on leveraging, with no social or environmental conditionality.  The enormous problems of tax havens and evasion are hardly mentioned, despite this accounting for €100 billions in terms of lost revenue in the EU," said Greens/EFA co-presidents Dany Cohn-Bendit and Rebecca Harms.

??According to French politician and member of the Greens/EFA? Karima Delli?, structural funds do not represent a long-term solution and that little effect will be seen in countries feeling the full brunt of the crisis, like Greece. Delli emphasised that the funds must meet sustainable development requirements and that they "do not come at the expense of promoting social inclusion and the fight against poverty." 

Delli also warned about the "inherent risk" of mobilising structural funds in the form of "project bonds", whose effectiveness she said had "not been proven in all sectors."

?Joseph Daul, Chairman of the European People's Party group in the European Parliament said that  adopting the proposals on growth from the European Commission, who, until now, was having trouble getting them approved, the 27 Member States made a good decision. "The proposals rest largely on the use of existing funds for financing new investments," said Joseph Daul after the European Council summit.

Transport & Environment, an NGO, was sceptical about the growth pact, saying infrastructure projects have shown little value until now.

"It's time to learn the lessons from past infrastructure spending," said Nina Renshaw, Deputy Director at T&E.

"Building motorways and airports with EU money have not put Spain or Greece on the path to growth. Europe must do better, and demand that transport spending contributes to cutting Europe's €300 billion annual oil import bill, as well as creating sustainable jobs."

Werner Hoyer, European Investment Bank President said “We welcome the recommendation of our shareholders to increase the capital of the European Investment Bank to allow the Bank to increase lending and play its part in bringing Europe out of the crisis. We are committed to working closely with shareholders to ensure the effective use of the increased lending across all member states.  Additional support will focus on local investment needs, address specific financing challenges, notably supporting innovation and SMEs, and back priority projects."

Agreement on the €120 billion growth package had already been prepared one week in advance of the summit during four-way talks in Rome between the leaders of France, Italy, Spain and Germany.

French President François Hollande had made a European growth initiative one of his priorities since he was elected in May.

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