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Symposium 2015

Solution for A New Deal for Europe? - The Role of Investment for Prosperity in the Euro Area

The Challenge

Five years after the Great Recession the economic recovery in the euro area remains remarkably subdued. Labor markets have started to improve, but only very gradually. Above all, investment spending h ...

Five years after the Great Recession the economic recovery in the euro area remains remarkably subdued. Labor markets have started to improve, but only very gradually. Above all, investment spending has barely reached the levels recorded ten years ago despite historically low interest rates across the euro area. Uncertainty surrounding the future direction of policies, even surrounding the composition of the currency area as a whole, has apparently led to a wait-and-see attitude of businesses when it comes to investing into future markets. The credit-fueled boom that preceded  the financial crisis left the economy with a debt overhang and severe mismatches in the production structures (i.e. a huge capital stock distortion) that makes the diagnosis of aggregate output gaps particularly difficult. Resolving these obstacles and creating a business-friendly institutional environment, thereby unleashing investment to build up a productive capital stock, is of utmost importance to put the European economies back on a sustainable growth path and to bring people back to work.

The “Juncker Plan”: Involving Stakeholders

In a context of budgetary constraints and economic uncertainty, the newly-elected President of the European Commission Jean-Claude Juncker announced last November the launch of an “Investment Plan for Europe” to revive the European economy, boost investment and foster growth and jobs creation. The plan (that soon became known as the “Juncker plan”) targets investment in infrastructure and SMEs/midcaps; its backbone is the creation of the European Fund for Strategic Investment (EFSI) which will provide risk-bearing capacity for economically and technically viable projects, mobilizing up to €315 bn. investment in the next three years. It is based on the analysis that, under the current economic conditions, the €21 bn. EU guarantee will mobilize private investment with an estimated leverage factor bringing to life projects that lack a certain risk coverage to be financed.

This major initiative marks a leap forward in EU support to infrastructure: it largely builds on the expertise of the European Investment Bank (EIB), and complements existing programs such as, for example, the Connecting Europe Facility (CEF), and activities under European structural funds—including innovative financial instruments. The expected leverage effect is expected to act as a strong catalyzer, targeting key EU priorities. The recently adopted EFSI Regulation provides a comprehensive set of governance structures for project assessment, selection and support. The deployment of the EFSI appears to be in line with successful experiences and provides end-to-end procedures encompassing the lifecycle of project funding.

The Juncker plan’s promise is to activate a credible project pipeline across Europe—it will however face very different investment environments. In our view, a critical factor will be the identification of eligible and promising projects that effectively support European strategic goals and have a certain size. The set-up of the EFSI allows for significant flexibility in project selection and prioritization. It is, however, a demand-based mechanism, which could affect its ability to reach full capacity in a limited timeframe.

The existence of a perfectly suitable project pipeline for this initiative will be key to success. This can be achieved by market mechanisms only or be supported by additional measures.

It requires a dialogue with all sides of infrastructure projects to address investment gaps in line with donors’ strategy and identify or trigger feasible projects. In our view, a good proposition would be the creation of mechanisms for active stakeholder involvement to promote and accelerate project building and identification, in each country and across industries, linked to EU priority areas and to the most important investment gaps. Relevant stakeholders should be government experts, industry representatives, financial institutions like promotional banks and SMEs or associations representing these.

The dialogue between sector- and industry-specific players will create the necessary conditions for identifying synergies between potential investors and support mechanisms, and limit risks in the further application process. This dialogue can take place in various forms. It can be through national or regional impact assessments on relevant project portfolios or ideas. It can also be achieved by building regular stakeholder panels or platforms. Good examples are already existing with Joint Undertakings by EU and industry partners as for instance Shift4Rail, SESAR and others.

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