After the outset of the Eurozone crisis, the EU has often come under attack for constraining member states’ room of fiscal manoeuvre, while falling short of providing them with the means to restore economic growth and create new jobs. As the levels of unemployment in southern Europe reached record-high levels, this problem became increasingly compelling and emerged as one of the main issues in the political campaign for the 2014 European Parliament elections. As a consequence, in the attempt to provide the European project with new stimuli and exert a direct impact on economic growth in Europe, in the summer of 2014 the European Commission’s new president Jean-Claude Juncker pledged to present a €300 billion European investment plan by the end of that year.
Delivering on this promise, Juncker presented his plan in late November 2014. The idea was to create a new European Fund for Strategic Investments (EFSI) totalling €21 billion and expected to generate a €315bn investment boost for the European Union’s economy over the period 2015-2017, with the EFSI funds serving as credit protection for a range of new activities to be carried through by the European Investment Bank (EIB). As the Commission soon clarified, the aim of the project was to attract private investments, so only projects involving public-private partnerships were to be included by the plan. Also, the commission established the EFSI to be provided with an independent committee in charge of selecting the projects based on their quality and impact on economic growth and jobs.
After the signature of a cooperation agreement with the EIB, the Commission announced that the plan would start being implemented in autumn 2015. Notwithstanding these resounding announcements, less attention has been paid by the media to verifying actual effectiveness of the plan in the subsequent months. Overall, during its first year the EFSI appears to have raised more than €100 billion, allocating €3.5 billion to support 141,800 start-ups and small firms and €9.3 billion for 64 major infrastructure projects. Moreover, since June 2016 the Commission has kept on proposing to extend its investment plan after its scheduled end in 2018 and until 2020, with the aim to top up the fund to €500 billion.
POLITICAL FAULT LINES
The announcement of the Juncker Plan was warmly welcomed by the European Parliament (EP), where it was endorsed by the two major political groupings, the European People’s Party and the Social Democrats. However, critical voices were not absent. In particular, the most contentious aspect was the plan’s “leverage” factor: far-right, left-wing and Green MEPs claimed that the high leverage made Juncker Plan a fantasy which ensured that the risks would be public while any profits would be private. Also, they cast serious doubts about the feasibility of raising more than €300 billion from roughly the 5% of “real” money coming from European institutions.
A general endorsement came also from EU leaders, although substantial differences—most notably between France and Germany—remained over the substance of the plan. The French government looked for new sources of financing, in order to avoid the EU’s €300 billion plan ending up being “fake money”—or recycled funds drawing from existing programmes. The European Stability Mechanism (ESM)—a fund set up in the midst of the Eurozone crisis to bail out states on the verge of bankruptcy—was a likely candidate for finding additional financial resources. Yet German finance minister Wolfgang Schäuble put a veto on diverting ESM money to help boost growth and job creation and appeared to be suspicious that the focus on investments diverts attention in Paris and southern European countries from the promised economic reforms.
Further issues were related to the degree of budgetary flexibility related to member states’ contributions to the fund. According to the proposal, governments contributing to the EFSI would not get into trouble if their contributions would result in their deficits breaching EU budget rules set out in the Stability and Growth Pact. This key feature of the Juncker plan was meant to appease center-left governments, including those in France and Italy, which were demanding more flexibility within EU budget rules. While Merkel acknowledged that member states’ contributions to the plan would be treated with flexibility, she stressed that the 3% deficit limit in the Stability and Growth Pact would still need to be observed.
Another line of conflict has emerged between Southern and Eastern Europe. Southern European countries have expressed satisfaction with the implementation of the programme. Spain appears to have so far benefitted the most in absolute terms from the EFSI, with the EIB approving funding for 27 projects for a total investment of €3.2 billion. After Spain, the biggest beneficiary is Italy. More generally, most of the funds have been allocated to Western Europe. Conversely, the Juncker plan is having a hard time to make inroads in eastern Europe, where the private sector is less developed. Since a key factor in the selection of projects is their capacity to attract private investors, this criterion causes more difficulty for eastern Europe to seize the benefits of the plan. However, in order facilitate the access of the eastern member states to EIB investment, the Commission has later given permission for the Juncker Plan to be combined with European structural funds.
Furthermore, disagreement among supranational institutions has spread following the proposal to extend the plan. The EU Court of Auditors, in a report published on 11 November 2016, questioned the efficiency of the plan, saying that there is a risk that its multiplying effect is “overstated”, while there is a lack of data about the impact of EFSI to support the Commission’s proposal to prolong the fund beyond 2018 deadline. These doubts have been also voiced by a number of German MEPs, criticising EFSI’s results and expressing concerns with regard to the extension of the plan. On the contrary, the Commission published its own evaluation in October, stating that the plan “has proven useful in encouraging a sustainable increase in investment in EU member states”, and defending its extension. These conclusions on the effectiveness of the plan have been strongly backed by Commission vice-president Jyrki Katainen, who has reaffirmed the EU executive’s willingness to extend the plan until 2020 and raise €500 billion, which he defined “as a matter of priority”.
As low economic growth and high unemployment in Europe remain a largely unsolved issue, doubts keep being cast upon the proposal to extend the EU investment plan. As pointed out in an independent evaluation made by the private consultancy Ernst & Young, the most contentious aspects of the plan are the questionable added-value of the funded projects and their geographical spread, as the richest EU countries appear to have received more support. Some 92% of the fund’s portfolio concerns operations in the 15 richest EU countries, while only 8% is located in the less developed ones. Similar concerns were advanced by the think tank Bruegel in a May 2016 report, which claims that out of all the projects approved to date, only one of them was actually new—namely, it was not already funded by the EIB.
Notwithstanding this criticism, on 6 December 2016 EU finance ministers backed the European Commission’s proposal to expand the investment plan to mobilise at least €500 billion by 2020. Thus, no political obstacle seems to prevent the Juncker Plan from further developing. Nonetheless, it is reasonable to claim that the actual success of the plan will be dependent not just upon the fulfilment of its goal in terms of funds raised, but also on its capability of financing new and riskier projects—that is projects that cannot easily attract private investors—and by the geographical balance of the projects funded. More detailed assessments will be needed in the upcoming months to evaluate the overall impact of the plan in terms of fostering economic growth and creating new jobs where they are most needed.
Photo Credits CC European Parliament
Also published on Medium.