Euro Watch – Is the Juncker investment plan working?

by: Nick Kounis

In this publication: Europe’s investment plan has recently been heralded as unlocking EUR 100bn of EU investment, though the total amount lent actually amounts to only EUR 12.8bn, while total EIB lending trends do not appear to have materially changed. Although the EIB continues to play a valuable role, the Juncker investment plan does not look like being a game changer

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Evaluating the Juncker plan a few months on

The investment plan for Europe was launched at the end of 2014 to help tackle the weakness of investment and overall economic growth over recent years. It has the ambitious aim of unlocking EUR 315bn of investment over a three year period (mid 2015 – mid 2018). This would equate to a direct annual boost to EU GDP of 0.7%. Indeed, calculating indirect effects as well, the European Commission calculates the total boost could be bigger, adding up to 1% annually to GDP and creating up to 1.3 million jobs over the 3-year period.

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One year into the programme, we ask whether the investment plan is having the desired impact. We start with a brief outline of the plan itself and go in to accessing whether or not it is working.

The Investment Plan for Europe: quick wrap

The Investment Plan for Europe consists of three pillars. The main one is the setting up of the European Fund for Strategic Investments (EFSI). EFSI is an initiative launched jointly by the EIB Group – European Investment Bank and European Investment Fund – and the European Commission to help overcome the current investment gap in the EU by mobilising private financing for strategic investments. The EFSI is based on a EUR 16bn guarantee from the EU budget and EUR 5bn from the EIB’s capital (see chart below). Crucially, the EFSI is integrated into the EIB and the EFSI projects will be subject to the EIB’s regular governance, though it will also include projects with a higher risk profile than the EIB’s ordinary activities.

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This EUR 21 billion endowment of the EFSI will allow the EIB Group (both EIB and EIF) to back financing worth roughly EUR 61 billion over the investment period, on top of its ordinary activity (which was around EUR 80 bn in 2014). How does EUR 61 bn turn into EUR 351 bn? The EFSI assumes the EIB Group loans will attract third-part co-financing. Overall, from the endowment to the total investment amount, a multiplier of 15 is assumed.

The other two elements of the Investment Plan for Europe involve somewhat vaguer initiatives to promote international investment in Europe and create an ‘investment-friendly’ environment.

The numbers so far

The EIB group has approved EFSI financing of EUR 12.8bn in the first year of the project. That is below the EUR 20bn a year of financing implied by the total potential of EUR 61bn. However, the EIB claims that the financing has ‘unlocked investment’ of EUR 100bn related to EFSI approvals, which appears to be on track, as it is roughly a third of the desired ambition. The EUR 100bn number related to the total projects that the EIB group has co-financed. This implies that the ‘external multiplier’ is higher, so that the initial EIB financing has managed to generate more co-financing than assumed in the original targets. To put it another way, the EIB has been financing a smaller proportion of each project on average than it had assumed.

Is the investment plan working?

On the basis of the EFSI numbers, it seems on the surface that the Investment Plan is working. However, there are two key tests of this. First of all, is the EIB providing more financing than it would have done otherwise? Second, would those projects/investment have been made without the EIB involvement?

EIB lending trends have not changed remarkably

To start off with the first point, it does not seem that the EFSI has led to a step change in EIB lending trends. The chart below shows EIB Group lending over time and the EFSI contribution. The first point that stands out is that EFSI lending is relatively small compared to the total. Last year, the first year of the Investment Plan, total EIB lending (regular EIB lending + lending under EFSI) did increase by EUR 4.2bn compared to 2014. However, the increase was actually less than the lending under the EFSI (EUR 7.5bn) suggesting there may have been some substitution. In addition, the increase between 2015 and 2014 was actually less than the increase between 2013 and 2014, suggesting that the Investment Plan did not lead to a clear change in trend.

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Early data for 2016 appear to be consistent with this view as well. Up until now, projects financed by the EIB have totalled around EUR 24.6 bn. Adding an estimated amount for the EIF would take total EIB Group lending to around EUR 26.8bn. This suggests a slowdown from 2015 if there is no acceleration in the second half of the year. In addition, EFSI lending slowed somewhat to EUR 5.3 bn compared to the second half of last year. Again these are preliminary numbers, so it is too early to draw strong conclusions about 2016.

This an evaluation of the plan in terms of quantity of loans, but of course it is unclear whether the nature of the loans have changed. As the EFSI has a remit to finance projects that have a higher risk profile, it can be that loans have been made that would not otherwise have taken place. This remains an open question, but one may have also suspected that if this was the case, total EIB lending would be higher as well.

EFSI has likely not led to step change in investment

Has the Investment Plan led to a clear change in investment dynamics in Europe? The balance of evidence suggests that it probably has not. To start with the EFSI loans themselves, they make up around 12% of the total sum of the projects financed. Although EIB participation is good for the reputation of a project, it would be a stretch to imagine that none of these projects would go through without its financing. In addition, investment appears to have been recovering gradually in line with moderately improving fundamentals. For instance, for the eurozone, investment trends have been broadly in line with profit trends (see chart) so nothing out of the ordinary there.

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It could be argued that the big boost from the Investment Plan is still to come. Possibly. However, recent surveys suggest that the investment recovery has lost a little bit of pace. For instance, the ECB’s Bank Lending Survey reported a slower pace of loan demand growth from nonfinancial companies for the purposes of investment spending in Q1. In addition, business confidence has been soft over recent months.

EIB continues to play valuable role, but Investment Plan is no game changer

Overall, the EIB continues to play a valuable role in the European economy. In addition, efforts to step and enhance that role are very welcome in a climate where economic growth has been lacklustre. However, up until now, there is little evidence that the plan has been a game changer for the investment outlook at a European level.