Alexander Ulrich and Steffen Stierle
There is a need in the EU for more investments – on the one hand to overcome the chronic crisis and on the other to fund the urgent rebuilding of the social and environmental infrastructure. Crumbing schools, structurally deficient bridges and excruciatingly slow Internet connections testify to a yawning investment gap. In short, money has to be spent.
The EU Commission under Jean-Claude Juncker is proposing an extension of EFSI, the European Fund for Strategic Investments. Instead of terminating in 2018, it would run until 2020. The public funds and EU guarantees would be topped up from 21 billion euros to 33.5 billion. In this way, the intention is to mobilise 500 billion euros in investment capital instead of 315 billion as originally planned. This sounds like a lot of money, but on closer inspection it shrinks away rapidly.
More Hot Air than Genuine Investments
The first thing to consider is the leverage factor. In order to turn 33.5 billion euros of public funds into an investment volume of 500 billion, a leverage effect of 15 is needed. Every publicly invested euro, in other words, must mobilise 15 euros in private investment. The achievement of this target cannot be properly verified. Although the Commission maintains that EFSI is on course to meet this target, there is a great deal of sleight of hand behind its calculations. For example, every investment project involving an EU guarantee is ascribed in full to EFSI by the Commission. According to international standards, it should count only that part of a project to which the EU guarantee relates. Such tricks can certainly be used to boost the figures, but the higher figures do not translate into more investment.
Then there is the additionality factor, in other words the question whether the private investments attributed to EFSI were actually made because of the allocation of EFSI funds or whether they would have been made anyway and the investors simply availed themselves of the public support since it was there. This cannot be properly ascertained either. What is suspect is that no application for project support has yet been rejected because of doubts about the additionality of the project. A survey conducted by the consultancy organisation EY, moreover, suggests that a significant proportion of the investments attributed to EFSI would have been made even if there had been no public support. Ten of the surveyed recipients of EFSI funding stated that their project could not have been implemented on the same scale and during the same period without EFSI. Eight respondents said that they would have had to postpone their investment. Nine indicated that EFSI influenced neither the scope nor the timing of their project.
It must therefore be assumed that much of the talk of 315 billion euros by 2018 and 500 billion by 2020 if the extension is approved is hot air. The volume of additional investments actually generated by EFSI is probably far lower, firstly because a leverage effect of 15 is unrealistic and secondly because it is by no means the case that none of the investments attributed to EFSI would have been made in its absence.
What is more, even the public funds of 21 billion euros by 2018 or 33.5 billion by 2020 need to be seriously reassessed in the light of an objective examination, for the EU share is largely stocked by means of redistribution from other pots, such as the research and development (R&D) budget. If less money is available for R&D, however, that adversely affects the level of investment. This is the other side of the equation, but it has been disregarded.
The planned top-up, moreover, can hardly be described as new funds. Much of the increase is to be achieved by lowering the contingency element of the guarantee fund. This would certainly release more money for investment but would also increase the risk of default. Furthermore, the top-up is likewise to be based on redistribution from other pots, such as the Connecting Europe Facility, which could result in declining investment in other areas.
Privatising Profits and Socialising Risks
From all of the foregoing points, it may be inferred that EFSI is far less formidable than it is portrayed. Unfortunately, these points do not cover the entire list of criticisms. Investment policy is not only about quantity.
One problem regarding the quality of EFSI is its attachment to the principle of privatising profits but socialising risks. Accordingly, the public treasury is always left holding the risky stakes so that the private sector can benefit from safe, high-yield investments. For this reason, even the Commission proceeds from the assumption that losses will account for 33.4% of the entire amount of funding. Europe’s taxpayers will foot this bill, whereas private investors’ losses are likely to be minimal and their profit margins high. Our wealth of experience of public-private partnerships (PPPs) in Germany only reinforces this expectation.
Another problem relates to regional distribution. According to the European Investment Bank (EIB), 92% of all EFSI investments have been made in the EU-15 countries. This leaves only 8% for the Eastern European members with their relatively weak infrastructures. Moreover, 63% of all investments have been made in three large Member States, namely Great Britain, Italy and Spain, with Great Britain the undisputed leader among the recipient countries. This is remarkable, not only in view of the country’s relatively favourable economic situation but also in the light of Brexit.
EFSI as an Instrument of Authoritarian Economic Governance
The International Monetary Fund (IMF) is already thinking out the next step. It is calling on the EU not only to extend EFSI (EFSI 2.0) but also to make it permanent (EFSI+). Indeed, it is not improbable that extension will only be a stepping stone on the way to a permanent investment fund. After all, the five presidents – the presidents of Commission, European Council, Central Bank, EU Parliament and Eurogroup – proposed a permanent investment fund in their report, coordinated by Mr Juncker, entitled Completing Europe’s Economic and Monetary Union. According to the report, access to the Economic and Monetary Union is to be conditional on fulfilment of certain reform obligations. Essentially, in accordance with the Troika approach, these obligations will mainly be about welfare cuts, public-sector job cuts and privatisation programmes. EFSI would thus become another lever for the enforcement of neo-liberal deregulation programmes. In this scenario, any beneficial impact on growth is likely to be outweighed by the recessionary effects of austerity.
A similar problem with EFSI has already surfaced. EFSI is one of three focal areas of what is known as the Juncker Investment Plan. Another area consists in creating an investment-friendly environment. What is meant here includes the deregulation of labour and product markets or, to put it another way, diminishing the protection of employees and consumers. In the event of an extension, the plans for this area include deregulation of the service sector and lower equity ratios for banks that invest in infrastructure. In the debate on the extension of EFSI, the German government has been a particularly staunch advocate of greater emphasis on this very area. It follows that an extension of EFSI is likely to result in the expansion of neo-liberal reform policies with all their devastating social and economic consequences.
For a Public Programme of Strategic Investment
To close the investment gap, reinvigorate the economy and fund the urgent rebuilding of the social and environmental infrastructure, two things are needed: one is an end to the Troika-style recessionary policy, and the other is massive public investment. EFSI delivers neither of these. It should therefore be replaced by a wide-ranging public programme of strategic investment. An appropriate volume would lie between 500 and 600 billion euros a year. This programme should be focused on the development of social infrastructure and an environmental transformation of industry as well as on the realms of education, culture and health.
To fund this programme, it would be wise to involve the European Central Bank (ECB). Instead of pumping zillions into the private banking sector and so driving up asset prices, the ECB should be placed under parliamentary oversight and be required to fund a strategic investment programme. A complementary financing strategy would comprise the systematic EU-wide coordinated taxation of large assets. On the one hand, this would shrink the bloated financial markets by extracting money from them; on the other hand, it would bolster public budgets to such an extent that an investment programme equipped to meet today’s challenges would become fundable.