Investor Skepticism

The E.U.’s $344 Billion Fantasy Fund

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The European investment fund aims to tackle three problems at once: improving Europe's infrastructure, creating jobs and boosting economic growth.
  • Why it matters

    Why it matters

    If a new European fund to boost investments fails to prop up economic growth, the continent will keep facing high rates of unemployment and indebtedness in some of its countries.

  • Facts

    Facts

    • The European Fund for Strategic Investments is being set up with the goal of triggering €315 billion in investment and creating 1.3 million jobs over three years.
    • The E.U. Commission and the European Investment Bank are scheduled to sign an agreement today on technical details to set up the fund.
    • The fund will seek out projects to develop sectors such as the digital economy and renewable energy.
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    Audio

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When it comes to Europe’s latest money pot, the bigger the better, at least as far as Jean-Claude Juncker is concerned. The European Commission president is, after all, the architect of the new European Fund for Strategic Investments, or EFSI, commonly dubbed the “Juncker Fund.”

The plan is to provide financing for infrastructure and innovation in areas such as energy and digitization on a scale that the market can’t mobilize on its own in the wake of the financial crises that have dogged the continent.

A total of €315 billion, or $344 billion, is to be made available to overcome what E.U. officials call an “investment gap” in the 28-nation bloc, and to create 1.3 million jobs by boosting the E.U.’s gross domestic product by up to €410 billion in three years.

Parts of Europe are still suffering from the financial crisis in 2008-2009 and the debt crisis in 2012. Unemployment this year is expected to be between 8 and 13 percent in the E.U. countries of Belgium, Portugal, France and Italy and as high as 22 and 26 percent in Spain and Greece respectively.

Government debt as a percentage of economic output is estimated at 89 percent in Britain, 96 percent in France, 107 percent in Belgium and 133 percent in Italy, according to European Commission data.

“I must warn against dreams of a wondrous multiplication of money.”

Ingeborg Grässle, Head of the budget committee, European Parliament

So far, the fund only exists on paper. Today, the European Commission and the European Investment Bank, also called E.U. bank, will sign an agreement on the technical details of the fund, and it will start operation in the fall.

“We are currently confronted with a particular market failure,” EIB President Werner Hoyer told Handelsblatt. “Despite low interest rates, ample supplies of liquidity and numerous projects, investors and companies aren’t in a position to carry out these investments on their own because their risk-bearing capacity, and that of the banking sector, remains diminished. That is why the E.U. bank as public institution is required to act.”

But there are doubts whether its goals are realistic. The success of the new fund will hinge on its ability to find investors, because its initial funding is relatively modest at €21 billion. And potential financiers from the private sector aren’t sounding particularly euphoric about it.

A common complaint is that the whole project is still too vague, with an absence of concrete plans for channeling money to the real economy.

 

EU unemployment and economic growth European Unions Suffering-01

 

“Instead of general statements of intent it would be interesting to find out what the project is supposed to look like,” grumbled one representative of a large German asset manager.

German investors in particular are skeptical about the prospect of a big new politically organized capital-gathering center for large-scale infrastructure projects.

“If the Juncker plan leads to a crowding in, meaning it kickstarts public-private partnerships in infrastructure finance, that would be something to be welcomed,” said Claus Fintzen, director of infrastructure debt at Allianz Global Investors, the asset management unit of insurer Allianz.

He said his company would be prepared to invest in transactions supported by the fund. But he added a warning: “What must be avoided is that there’s just a crowding out, that public initiative displaces private sector investment.”

The main problem isn’t a lack of finance, said money managers: it’s a lack of promising infrastructure projects.

“I must warn against dreams of a wondrous multiplication of money,” said Ingeborg Grässle, the head of the budget committee in the European Parliament.

Philipp Eckhardt, a policy analyst at the Center for European Policy, a think tank, said: “One shouldn’t expect the fund to become a panacea.”

The fund wants to finance projects worth €4.5 billion by the end of this year. That leaves the tidy sum of €310.5 billion to find projects for 2016 and 2017.

 

Jean-claude Juncker European Commission president Source Reuters 40843134
Jean-Claude Juncker, European Commission president, wants to boost employment and economic growth. Source: Reuters

 

Mr. Eckhardt also warned that the fund’s guarantees might prompt investors to opt for projects they would not otherwise have funded, because they’re not profitable without public support.

“It carries a major risk that resources will be misallocated,” he said. He added that the new investment drive won’t solve any of the problems that caused the decline in net investments in the European Union.

Will E.U. funding evolve from one-off payments and subsidies to more loans and guarantees? Is the fund a blueprint for a new budget revolution? The next two years will tell.

E.U. subsidies don’t enjoy the best reputation. Critics often say they’re misallocated and inadequately monitored. That could change with the investment fund.

“The EFSI guarantees that largely come from the E.U. budget permit a significantly more efficient allocation of public funds,” Mr. Hoyer of the European Investment Bank said. He called it a “paradigm shift” in the use of E.U. resources.

The potential advantages of the fund became evident at the E.U.-China summit in Brussels last month when Chinese Premier Li Keqiang indicated that his country would make strategic investments via the investment fund. The vehicle offers a reliable framework for private investors because it is embedded in the structure of the European Investment Bank.

Many E.U. member states plan to support the fund via their national development banks. Germany is contributing some €8 billion and Britain is even throwing €8.5 billion into the pot. Spain, France, Italy, Luxembourg, Poland, Slovakia and Bulgaria have also signed up to contribute.

 

Werner Hoyer President European Investment Bank EIB Source David Klammer WirtschaftsWoche 47058617
Werner Hoyer, president of the European Investment Bank, is confident the new European investment fund will succeed. Source: David Klammer / WirtschaftsWoche

 

Asked how he proposed to ensure that the EFSI’s funds aren’t mainly used for national prestige projects, Mr. Hoyer said each project would be individually vetted and decided on not just by the fund’s management but by a board that included representatives of the 28 E.U. states. “That is an efficient mechanism against bad investments,” he said.

“All the participants know: if they back a project that isn’t viable, the loss would be spread across all 28 states via the balance sheet of the E.U. bank.”

He denied that there weren’t enough projects to invest in. “The E.U. Bank is in close touch with member states and the business sector to view projects and choose the ones that are sustainable and have the potential to accelerate overall investment activity.”

He added, “We have a pipeline that is promising and we are confident that we will reach the target of mobilizing an additional investment volume of at least €315 billion in three years.”

 

Thomas Ludwig is a Handelsblatt correspondent in Brussels. Anke Rezmer covers the investment fund industry for Handelsblatt out of Franfurt, Germany’s finance capital. To contact the authors: ludwig@handelsblatt.com and rezmer@handelsblatt.com

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