It is time for Europe to embark on a new trajectory where meaningful increased investment, growth and jobs are at the core. The Juncker plan as it is currently formulated is encouraging; however, it only represents a fairly small first step in this direction, write Giovanni Cozzi and Stephany Griffith-Jones.
Giovanni Cozzi is economic adviser at the Foundation for European Progressive Studies and Stephany Griffith-Jones is currently financial markets program director at Initiative for Policy Dialogue, Columbia University
This week, Commissioner President Juncker unveiled his €315 billion investment plan. Juncker’s presentation started with a positive and refreshing shift away from emphasis on fiscal discipline only as he advocates a new start based on investment, growth and jobs for Europe. As Pittella, the Head of the S&D Group in the European Parliament has said, it is a good starting point, as the austerity has been broken. However, the proposed measures are clearly not enough to stimulate sufficient investment in Europe, let alone bringing Europe towards generating enough growth and jobs, given the very weak current performance.
In its current form the proposal implies a contribution in cash from the European Investment Bank (EIB) of €5 bn towards a new European Investment Fund. Although a contribution from the EIB to the new fund represents a positive step in the right direction, we believe that this contribution of public funds is too low, to crowd in sufficient private investment.
In a recent paper we highlighted how an increase by member states in the paid-in capital of the EIB capital by €10bn could generate up to €180 bn additional public and private lending for investment. The increase in the paid-in capital would then strengthen much more the role of the EIB in investing in innovative projects in areas such as energy efficiency, technological development, and renewables, as well as increase lending to small and medium enterprises for more job creation.
Commissioner Juncker also proposes to use €16 bn from the EU budget as a guarantee for this new investment fund. It is claimed that this guarantee would stimulate a significant amount of investment. President Junker has estimated that the maximum leverage effect for this fund is around 15, so every euro invested in the fund would potentially generate €15 of resources for investment.
However, if we take into account that the €16bn do not represent new money but only a guarantee, it is likely that the leverage generated, and the impact by the new fund could end up being much lower. Also guarantees are complex and therefore slow to be implemented, so it may take too much time to have effect
The plan also advocates for a voluntary contribution to the new fund by EU member states. This is a positive step to create a more coordinated investment strategy between supranational and national institutions. It is also particularly encouraging that the contribution by Member States will not be included in the calculation of the 3% deficit-to-GDP ratio, introducing desirable flexibility. However, it would be much more effective if all European countries were asked to contribute rather than leaving it on a totally voluntary basis. The impact of such valuable obligatory national contributions would, in any case, have a very small impact on EU countries fiscal deficits, as shown in estimates produced by the Polish Finance Minister.
Another important pillar in Juncker’s plan is the proposal to reduce red tape and the regulatory burden in order to stimulate investment in Europe. Although we welcome proposals for reducing red tape, we would raise concerns if the reduction in regulatory burden for the financial sector would translate into further deregulation. Financial deregulation was one of the major causes of the economic crisis. Further deregulation could end up increasing financial instability.
Finally, President Juncker clearly stated that this investment plan has to go hand in hand with continued austerity. We believe that this strategy could undermine the full potential of the proposed investment plan. A recent study conducted by FEPS, in collaboration with CDPR (SOAS) and the University of the West of England, estimates that the stimulus effect of the Juncker-proposed investment plan, on its own, would be far too modest and would appear to be neutralized, to some extent, by continued reduction of national government expenditures and public investment as a result of planned excessive fiscal consolidation, both in surplus and deficit EU countries.
It is time for Europe to embark on a new trajectory where meaningful increased investment, growth and jobs are at the core. The Juncker plan as it is currently formulated is encouraging; however, it only represents a fairly small first step in this direction. The European people deserve better!