Forget QE, says EIB: make Juncker’s €300bn plan work
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Emerging Markets

Forget QE, says EIB: make Juncker’s €300bn plan work

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Jean-Claude Juncker wants the EU to invest an extra €300bn in the next three years to get growth going and restore competitiveness. Pie in the sky? European Investment Bank president Werner Hoyer doesn’t think so. In fact this, not QE, is more likely to get investment restarted

Jean-Claude Juncker’s plan to generate €300bn of extra investment in the EU in the next three years is achievable, the president of the European Investment Bank has told Emerging Markets.

With fiscal leeway limited, the European Central Bank constrained and structural reforms taking time, many are pinning hopes for recovery on the new European Commission president’s Jobs, Growth and Investment Package.

Announcing the plan in July, Juncker highlighted broadband, energy, transport and research as needing investment, and said the EIB would be involved. But few details have emerged so far.

Observers doubt that the EU can find €300bn of fresh money, or enough new projects.

“We’ve been here many a time. There’s a risk that this is money that’s already being spent, that gets put together as a programme,” said Andrew Milligan, head of global strategy at Standard Life in Edinburgh. “And to have an effect, they should be thinking of investing in 2015 or 2016, but these projects take five or 10 years.”

Werner Hoyer, EIB president, told Emerging Markets on Wednesday: “For some people the sum of €300bn is so incomprehensible that they continue to think only of public money. But I believe, as an economist and as head of the EU bank, that €300bn is completely realistic.”

The EIB had, he said, used its €10bn capital increase in 2012 to invest €60bn extra in 2013-15. That was multiplied at least three times because the EIB always invests alongside other private or public investors.

“So with that €10bn, we will probably have triggered extra investment of about €200bn by 2015,” Hoyer said, making Juncker’s additional €300bn target look less daunting.

Hoyer said he supported the ECB’s measures, but further asset purchases would have limited effect.

“They have been very helpful to buy time for the politicians to clean up the mess,” he said. “But we are now so low in interest rates that the importance of interest rates as a determining factor for investment has disappeared. It is not to be expected that monetary policy incentives will trigger huge new investment demand.”

COMPETITIVENESS HAMMERED

What Europe needed, Hoyer said, was to address its 20% decline in annual public and private investment since 2007, and an innovation gap, which had hammered competitiveness. The EU was trailing far behind its main competitors — the US, Korea, Japan and several Asean countries — in cutting edge education, research and commercialisation of research outputs, Hoyer said.

The EIB has begun to seek first for opportunities to invest, before asking for more money. It has formed a task force “to see what is slumbering in the drawers of public and private investors”. National development banks like KfW, ICO and CDP are involved.

But this is unlikely to yield an easy list of projects, ready to be financed. Rather, it will be an analysis of sectoral needs, which the EIB will present to the European Council, probably in December.

The Juncker plan will not involve national budget increases. Money should be reallocated within budgets, Hoyer argued, away from consumption and subsidies and towards investment and risk-taking, especially via guarantees and equity.

By taking a first loss tranche in financing a new port, the EIB, EU or a government could release 10 times the money it put in.

Asked whether the EIB could guarantee mezzanine ABS tranches, enabling the ECB to buy them, Hoyer was cautious. The EIB would remain conservative and was a project finance institution, not one for refinancing. But he said it was conceivable, perhaps especially for new loans.

Finding €300bn of viable investment projects would not be simple, Hoyer admitted — adding that the EIB’s €20bn increase in business volume “has not been easy to do”.

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