The ‘Juncker Plan’: a bridge too far?

In January, the European Commission (EC) formally adopted the ‘Juncker Plan’– named after EC President Jean-Claude Juncker – with the aim of creating more jobs and boosting economic growth in Europe through infrastructure investment over the next three years. The plan has identified a pipeline of 2,000 projects, worth an estimated €1.3 trillion, which it expects to be financed primarily through the capital markets.

The EC has planned an initial investment of €21 billion from the European Fund for Strategic Investment (EFSI) – made up of €16 billion from the European Union (EU) and €5 billion from the European Investment Bank (EIB). The hope is that this initial €21 billion – alongside a combination of credit enhancements and incentives – will attract up to 15 times more through the “crowding-in” of private investment. Over the next three years, the plan aims to inject €315 billion into the European economy.

Success will rely on convincing investors that the plan is more than an overambitious ‘wish list’ of projects and that it instead provides attractive and viable investment opportunities. This is achievable, although a number of barriers must be overcome.

BUILDING A CASE: THE NEED FOR INFRASTRUCTURE INVESTMENT

Fortunately, the need for greater infrastructure spending – and the positive impact that targeted investment can have on the economy – is relatively well understood. While many countries in Europe saw economic growth in 2014, the macroeconomic environment remains weak. This is, in part, due to a high infrastructure investment deficit, i.e. a shortfall in spending when compared with historical investment levels. For instance, Bruegel – a Brussels-based think tank – has estimated the combined deficit of the EU-15 (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the UK) to be about €260 billion since 2006. Additionally, we estimate the 20-year accumulated investment deficit in the UK alone to be about £64 billion (€86 billion; $98 billion).

Furthermore, a study commissioned by the EC and EIB in November 2014 identified that EU investment in 2013 was 15 percent (€430 billion) below its pre-Crisis peak in real terms. These findings are a real concern for many EU member states, as compliance with the EU’s fiscal rules – which set numerical targets for budgetary aggregates – will be difficult to achieve if investment does not pick up soon. Therefore, attracting additional infrastructure investment is not only desirable but a necessity.

What is more, infrastructure investment has been shown to benefit the economy far beyond the initial sum invested. For instance, simulations show that each additional £1 spent on infrastructure in the UK would increase real GDP by £1.90 over the following three-year period. We also predict that additional spending of 1 percent of GDP in the UK would add more than 200,000 jobs in the same timeframe.

In equivalent scenarios, we estimate the multiplier effect to be 1.2x, 1.3x and 2.0x for Germany, France and Spain respectively, and 1.4x for the entire Eurozone. It is worth noting that the magnitude of this effect depends on an economy’s place in the economic cycle – the multiplier tends to be strongest during periods of contraction or stagnation.

FINANCING THE GRAND PLAN

While the need for greater infrastructure spending is clear, many may wonder how the pipeline of 2,000 projects will be financed. The EC’s stated intention is to incentivise the ‘crowding-in’ of private investors into projects partly funded by the EFSI, established for the task by the EC.

The facility size of the EFSI will initially be €21 billion – most of which is allocated to long-term infrastructure investments, although nearly a quarter will be ring-fenced to fund investment in small and mid-size enterprises (SMEs) and mid-market companies. Of this initial amount, the EU will provide €16 billion in the form of guarantees, and the EIB will provide the remaining €5 billion through equity investments. The idea is that the EFSI will invest in higher-risk, higher-yielding projects – or in more junior positions in low-risk projects – to help attract further private capital 15 times greater than the initial €21 billion.

Converting €21 billion of EC funding into €315 billion of real long-term investments will require a significant amount of large-scale private investment, particularly from institutional investors such as pension funds and insurers. But, according to law firm Linklaters, the appetite is there. It claims as much as €800 billion could be provided by private funds for investment in European infrastructure before 2023. Therefore, while the EC’s goal is ambitious, it is achievable with the right incentives in place.

ATTRACTING INVESTMENT BY OFFERING UP INCENTIVES AND SOLUTIONS

To help reach its investment goal, the EC has introduced a number of credit-enhancing initiatives to stimulate investor appetite and encourage more capital market activity in infrastructure. Firstly, the EFSI fund benefits from first-loss guarantees from the EU. The idea is similar to that of the EC project bond initiative, which has provided just under €500 million in contingent liquidity support since August 2013 and successfully leveraged €3 billion of bond financing into five projects. Yet scaling-up these early successes to the level envisaged under the Juncker Plan will require more radical policy changes.

For example, the UK announced a withholding tax exemption for private placements in infrastructure in December 2014, which prompted six investment companies to immediately commit £9 billion to the sector. Allianz Global Investors alone announced it would allocate upward of £3 billion over the next three to five years. Replicated successfully on the European level, similar tax incentives could be the shot in the arm that is required to turn an EC project ‘wish list’ into an investment reality. But, in addition to this, the EC must also offer solutions to what are viewed as the biggest roadblocks for the ‘Juncker Plan’: a short timeframe, and a lack of transparency or detail necessary to prioritise the projects and make them attractive investment propositions.

To this end, the EC has proposed the development of long-term investment plans, such as value-for-money assessments to identify the most efficient project-structuring solutions and new financial instruments to advance viable projects that are not yet financed. In addition, the EC hopes to increase transparency further with the launch of an EU-level website that links to all member states’ project pipelines.

A clear explanation of how the projects will be prioritised and financed will help the EFSI attract substantial sources of private capital through the crowding-in of investors. Of course, the EC’s Juncker Plan is ambitious. But with the right support and incentives, Europe’s multi-lateral institutions, politicians, and policymakers can transform it from an idea into a much-needed boost for the European economy.