Long live the Juncker Plan!
The long awaited Juncker Plan for investment in Europe has arrived a few weeks ago. Beyond the creation of a Strategic Fund, the Plan as a whole has disappointed: not adamant enough to eliminate the deep obstacles to cross-border investment, and opaque in generating the “List” of projects to be financed. Yet, even imperfectly, Europe has now done its homework.
By Natacha Valla
Post
The long awaited Juncker Plan for investment in Europe has arrived a few weeks ago. It is a three-pronged system that includes the creation of a Strategic Fund (the European Fund for Strategic Investment, or EFSI). Next to the Fund, there is a project pipeline, and the promise to take “measures” to create an investment friendly environment on the continent. For sure, the Fund is the sinews of war that might become a game changer for the future of Europe. But it still lacks upfront cash and a transparent governance. National Promotional Banks do hold the key for that. Only then can the private sector turn the plan into gold. But beyond the Fund, the Plan as a whole has disappointed: not adamant enough to eliminate the deep obstacles to cross-border investment, and opaque in generating the “List” of projects to be financed. Yet, even imperfectly, Europe has now done its homework.
Like all novelties, the European Fund for Strategic Investment (EFSI), the financial arm of the Juncker Plan, has triggered controversies. First critique: the public sector is criticised for having put too little fresh money on the table. Out of the headline number €315bn, only €8bn will actually be set aside by the Commission from the margins of the budget to back up a €16bn guarantee, to which the EIB adds a modest €5bn. “That is it”, complain those who would have loved to see a massive financial involvement of the public sector.
But it is not so much the lack of fresh public money as the lack of its recycling that is worrisome. Most EU Member States have little if any at all fiscal room of manoeuvre to spend more on public investment. But they do receive so called Structural and Cohesion Funds from the EU. There would have been a case to reorient them manu militari towards the newly created EISF: over time, Structural Funds have become sadly famous for lacking a strategic vision. Their allocation is perceived as opaque and sub-optimal. Unfortunately, that option is foregone (for now), and there is little hope that States will volunteer their money to the common Juncker pot.
Second critique: the foreseen leverage of the EFSI is feared to be too high. The stated objective is to mobilise (at least) €315bn by the end of 2017 to invest them in the real economy. With an initial stake of 21, this corresponds to a leverage of 1:15. Some doubt that the mechanism will effectively seduce external investors to such an extent.
But the EISF judiciously and explicitly foresees to host “other” actors, in three ways: via levered funds coinvested in projects; as buyers of bonds issued by the EIB; but also (this is key) as equity holders of the EFSI itself. Member States, National Promotional Banks, regional authorities and private investors have been invited to signal their interest. The negotiation table is likely to remain open for a (short) while. That negotiation window should not be missed!
National Promotional Banks (NPB) – that is, Germany’s KfW, France’s Caisse des Dépôts, Italy’s Cassa dei Depositi – can be the game changer if they choose to put the unavoidable upfront cash that the Fund needs to effectively work. Unlike national States, they do have the fire power to do that. It is regrettable that they have not been included in the Plan in a more formal, more institutional manner.
As to private investors – mostly pension funds, insurance companies, banks, asset managers - they should scrutinise what has been put on the table. Three dimensions seem key, some of which need to be clarified. First, the conditions under which public guarantees will be exerted. Second, whether or not the EIB would lose seniority. Third, the nature and conditions of the first loss capacity within the Fund.
Third critique: the strategy behind the Plan is seen as too weak. A long project list is on the table, but it is already anticipated to be too ad-hoc, too arbitrary and too vulnerable to vested national political interests. Here, it would be key to make the necessary governance arrangements so as to reassure potential private investors that they would not be forced into funding something useless, or financially weak, were they to consider getting involved. A lot of effort still needs to be made on that front.
All this said, the Juncker Plan has made a key step forward. It lifts an important constraint on the risk profile that usually applies to investments made by the EIB. Unlike (not all but) most of institutions that belong to the EIB constellation, the EFSI will be apt to genuinely bear risk. Its aim is to diversify away from loans as a financing instrument, and to venture into more exotic vehicles. This should be welcome at a time when the real economy needs more equity investors than debt holders.
Should we worry about the evasiveness of the Plan about its third pillar, ie the removal of obstacles to cross border investment? Frankly yes. More than Twenty years of single market have failed to create genuinely integrated European playing fields in the areas of energy, transports, digital and telecommunications. And these fields are the most obvious candidates for investment under the Juncker Plan. So instead of having made the “elimination of obstacles” a third leg of the dispositive, the Juncker Plan should have imposed an ex ante conditionality on it: “I will finance, but the single market needs to happen first”. The risk is high that the harmonization of rules explicitly foreseen in the Plan will remain dead letter given the pervasiveness of political and legal impediments. The East seems to have already understood what’s at stake: The ‘Visegrád Four’ - Poland, Hungary, the Czech Republic and Slovakia- are already planning to interconnect their energy networks so as to speak with one voice to target EFSI funds. A lesson for their western neighbours!
Like all novelties, the European Fund for Strategic Investment (EFSI), the financial arm of the Juncker Plan, has triggered controversies. First critique: the public sector is criticised for having put too little fresh money on the table. Out of the headline number €315bn, only €8bn will actually be set aside by the Commission from the margins of the budget to back up a €16bn guarantee, to which the EIB adds a modest €5bn. “That is it”, complain those who would have loved to see a massive financial involvement of the public sector.
But it is not so much the lack of fresh public money as the lack of its recycling that is worrisome. Most EU Member States have little if any at all fiscal room of manoeuvre to spend more on public investment. But they do receive so called Structural and Cohesion Funds from the EU. There would have been a case to reorient them manu militari towards the newly created EISF: over time, Structural Funds have become sadly famous for lacking a strategic vision. Their allocation is perceived as opaque and sub-optimal. Unfortunately, that option is foregone (for now), and there is little hope that States will volunteer their money to the common Juncker pot.
Second critique: the foreseen leverage of the EFSI is feared to be too high. The stated objective is to mobilise (at least) €315bn by the end of 2017 to invest them in the real economy. With an initial stake of 21, this corresponds to a leverage of 1:15. Some doubt that the mechanism will effectively seduce external investors to such an extent.
But the EISF judiciously and explicitly foresees to host “other” actors, in three ways: via levered funds coinvested in projects; as buyers of bonds issued by the EIB; but also (this is key) as equity holders of the EFSI itself. Member States, National Promotional Banks, regional authorities and private investors have been invited to signal their interest. The negotiation table is likely to remain open for a (short) while. That negotiation window should not be missed!
National Promotional Banks (NPB) – that is, Germany’s KfW, France’s Caisse des Dépôts, Italy’s Cassa dei Depositi – can be the game changer if they choose to put the unavoidable upfront cash that the Fund needs to effectively work. Unlike national States, they do have the fire power to do that. It is regrettable that they have not been included in the Plan in a more formal, more institutional manner.
As to private investors – mostly pension funds, insurance companies, banks, asset managers - they should scrutinise what has been put on the table. Three dimensions seem key, some of which need to be clarified. First, the conditions under which public guarantees will be exerted. Second, whether or not the EIB would lose seniority. Third, the nature and conditions of the first loss capacity within the Fund.
Third critique: the strategy behind the Plan is seen as too weak. A long project list is on the table, but it is already anticipated to be too ad-hoc, too arbitrary and too vulnerable to vested national political interests. Here, it would be key to make the necessary governance arrangements so as to reassure potential private investors that they would not be forced into funding something useless, or financially weak, were they to consider getting involved. A lot of effort still needs to be made on that front.
All this said, the Juncker Plan has made a key step forward. It lifts an important constraint on the risk profile that usually applies to investments made by the EIB. Unlike (not all but) most of institutions that belong to the EIB constellation, the EFSI will be apt to genuinely bear risk. Its aim is to diversify away from loans as a financing instrument, and to venture into more exotic vehicles. This should be welcome at a time when the real economy needs more equity investors than debt holders.
Should we worry about the evasiveness of the Plan about its third pillar, ie the removal of obstacles to cross border investment? Frankly yes. More than Twenty years of single market have failed to create genuinely integrated European playing fields in the areas of energy, transports, digital and telecommunications. And these fields are the most obvious candidates for investment under the Juncker Plan. So instead of having made the “elimination of obstacles” a third leg of the dispositive, the Juncker Plan should have imposed an ex ante conditionality on it: “I will finance, but the single market needs to happen first”. The risk is high that the harmonization of rules explicitly foreseen in the Plan will remain dead letter given the pervasiveness of political and legal impediments. The East seems to have already understood what’s at stake: The ‘Visegrád Four’ - Poland, Hungary, the Czech Republic and Slovakia- are already planning to interconnect their energy networks so as to speak with one voice to target EFSI funds. A lesson for their western neighbours!
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