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28 November 2014

President Juncker’s European Investment Plan: has Christmas really come early?

Juncker investment plan

While the new €315 billion investment plan proposed by the Juncker Commission has been welcomed by the European Parliament, several think-tanks and economists have expressed doubts about the feasibility of this plan to ‘kick-start growth’.

Commission President Jean-Claude Juncker unveiled the details of his ‘Europe is back in business’ plan in the European Parliament on Wednesday 26 November. The plan proposes to make available money (€21 billion) from the EU budget and the European Investment Bank in order to set up a new ‘European Fund for Strategic Investments (EFSI)’. This money would be used as guarantees to entice private investors to take risks and invest, over the next three years, up to 315 billion in new European projects.

The new Fund will finance strategic projects across the EU such as broadband, energy and transport, education, research and innovation, renewable energy and energy efficiency. Part of the money will also be used to support investments by SMEs.

The Commission has asked the EU member states to top up the fund with extra money. The Commission believes that its ‘investment plan’ will create 1 to 1.3 million new jobs in the next three years.

The Parliament and the Council are expected to agree on the Commission’s proposal in December. The project should be operational by mid-2015.

The majority in the European Parliament endorsed Mr Juncker’s plan. S&D group leader Pitella said: ‘The austerity dogma has been broken’, but ALDE chief Verhofstadt made acceptance of the plan conditional on the adoption of further structural reforms. Philippe Lamberts of the Green group was more critical, accusing the Commission of ‘financial engineering’.

ETUC secretary-general Bernadette Ségol, while welcoming the Juncker plan, was hardly optimistic in her overall assessment: ‘The European Commission seems to be relying on a financial miracle like the loaves and fishes. Raising €315bn would be quite a feat, but would fill less than 40% of the annual investment shortfall since the crisis. I am not holding my breath for a major impact on growth or unemployment. A lot more will be needed to get Europe’s economy moving. I urge European Governments to boost the investment effort’.

Several economists, think-tanks and economic journalists likewise expressed scepticism and reservations.

ETUI economists Martin Myant and Sotiria Theodoropoulou commented: ‘Although a plan that would kickstart investment in Europe is a step in the right direction, we doubt the feasibility of the plan. Private funds are more likely to be attracted only to the safest projects, located in the least troubled member states and not in those most in need of investment. We also believe that an investment plan of that scale will not, on its own, do enough to address the political and economic uncertainties that underpin the current investment gap in Europe. Unless decisive action is undertaken to change the aggregate fiscal stance towards expansion, and unless there is clear political support to the ECB to pursue more unconventional monetary policy, there will be no recovery in investment.'

On the EuroIntelligence blog, FT economic expert Wolfgang Munchau writes about the Commission ‘leveraging a zero’ as there will be no real fresh money, only guarantees. In an article in the Financial Times earlier in the week, the same journalist wrote – rather surprisingly – that only the radical left has the right approach to Europe’s debt.

Daniel Gros, senior economist at the Centre for European Policy Studies (CEPS), is also critical of the new plan. In a paper entitled ‘The Juncker Plan: From €21 to €315 billion, through smoke and mirrors’, Gross writes: ‘This package looks a lot like the €120 billion package of the ‘Growth Initiative’ that was announced amid much fanfare two years ago. Then, as today, most of the funding came from a re-allocation of budget lines, coupled with hopes of private-sector participation. Very little of the €120 billion has been spent two years down the line. It is difficult to see why this time should be any different’.

The same point is raised by Sussex University professor Mariana Mazzucato, who, writing in The Guardian, calls Juncker’s grand plan a ‘massive missed opportunity’. Mazzucato, an expert on innovation policy, stresses the important role the EIB could play in providing funds for the ‘real economy’ (in projects related to social inclusion, climate change and others). ‘Investment is what the Eurozone desperately needs, not the austerity we have heard so much about since the financial crisis. But if he [Juncker] wants this strategy to work, he needs to put his money where his mouth is. Increase direct investment, and provide the EIB with a strategy that goes beyond fixing “market failures” to maximise the transformative impact of public investments to shape and create markets’.

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