According to new President of the EU Commission, Jean-Claude Juncker, Europe is caught in an investment trap. Investment levels are lower than was the norm before the crisis despite the fact that “investors agree that the continent is an attractive place to invest”. Unfortunately, this attractiveness does not go hand in hand with confidence and credibility, which is why investment in Europe has not rebounded so far. Most of us are already familiar with the solution à la Juncker, a grand investment scheme whereby Brussels will provide an initial investment package of €21 billion that will later multiply by the factor of 15 to mobilize €315 billion of the private cash over the next three years.
Great top-to-bottom investment plans and governmental projects to boost economies are almost always welcome. People tend to have the impression that governments do care. In fact, money is always needed – at least this is what a general opinion seems to be. Nowadays though, there are not many people who actually believe that there is a lack of capital around and definitely not that kind of shortage that would require governmental intervention. Well, the Commission’s underlying assumption is that Europe is currently short of about €400 billion compared to the pre-crisis level in 2007. Unfortunately, this comparison is somewhat imprecise because 2007 witnessed the peak of the credit bubble with big amounts of inefficient and superfluous investment.
In its supporting documentation to the investment package, Brussels admits that the 2007-levels might not be the best benchmark and says that relative to pre-credit-boom, the investment gap is only about €200 billion. Although one would be tempted to think that the more investment, the better, in this case it is not exactly so, because Europe’s working population will be decreasing as of next year, which would (and likely will under the Juncker plan) mean more capital per worker, and thus also lower return to that capital.
Putting this aside, let’s say that more investment is generally needed and that new projects will create more jobs. The Commission stresses that these projects are not “for this country or that country” but they should be really impactful in the first place and also be free of political pressures. At the same time, Brussels mentions infrastructure, which, although riskier than other sectors, often is geographically centric. Thus, it remains a mystery how the Commission wants to avoid “for this country or that country” problem.
Moreover, another issue with the selection, which should be guaranteed by an independent body, is that it will probably prefer big companies to small and medium enterprises (SMEs). SMEs mostly lack reputation and tend to have problems with financing. Their projects are often riskier, yet are at the same time usually more innovative than those of big corporations. The Commission, however, assumes that even projects of SMEs, which have been promised €5 billion out of the initial €21 billion, will meet the 15-multiplier condition. Unfortunately, inadequate support of SMEs may not only go against other EU goals, which promise to ensure liquidity for these companies, but it can also endanger European innovativeness and entrepreneurship.
To be completely fair though, it is safe to say that Juncker’s investment plan will bring also positive things despite the fact that it has mostly garnered criticism. The grand plan will bring more discipline to the way Brussels redistributes some of its money which will be a major shift from the current system of grants to Member States to a more commercial and competitive scheme. Therefore, the plan will allow for EU funds to be used in business transactions, which should boost the support of the private sector for projects that would normally have not been viable.
Quite naturally, critics also have their point in saying that the financing of the projects and the lack of investment are not really an issue because most of the impediments are legal, political, and bureaucratic by nature with respect to uncompetitive public procurement and regulatory uncertainty. Yet, the Commission has embraced this challenge, pledging to deepen the single market and harmonize EU rules wherever applicable. Although the details are still unclear, it will be ultimately the willingness of the Commission and the Member States to tamper with its own regulations that will decide the fate of this grand investment bonanza.