13 October 2014

Wall Street Journal: Will Juncker’s €300 billion plan close the euro investment gap?

A new €300 billion investment plan proposed by Jean-Claude Juncker is looking suspiciously like another of these half-baked stimulus proposals. But suppose Mr. Juncker manages to get the plan up and running. Would it make a difference?

Since the start of the eurozone crisis, European politicians have periodically volunteered the European Investment Bank and the European Union budget as sources of funds that could be used to stimulate the bloc’s floundering economy. Then it turns out the EIB doesn’t want to get involved, and there isn’t much spare cash left in the EU budget. The ideas die a quiet death, and politicians hope few people remember they were alive in the first place.

A new €300 billion investment plan proposed by Jean-Claude Juncker, the incoming president of the European Commission, is looking suspiciously like another of these half-baked stimulus proposals. But suppose Mr. Juncker manages to get the plan up and running. Would it make a difference?

First, the program comes with several caveats. It’s €300 billion over three years, so it’s actually €100 billion a year.

Secondly, the €300 billion is public and private money; a Juncker official says it hasn’t been decided how much the public sector would actually contribute. The plan in part probably involves putting additional capital into the EIB, which could then borrow more on financial markets and ultimately increase its lending activity. But the EU would also have to find new mechanisms to raise this money, since the EIB would only be able to fund a fraction of the new lending activity. And that will take time and potentially be a logistical nightmare. So the private-sector money isn’t guaranteed.

But even if the money does start flowing as promised, it would make a small dent in what could be called the euro area’s “investment gap”: the amount of investment that should have happened if the crisis hadn’t occurred and “gross fixed capital formation” – spending on equipment, physical structures, etc.. – had continued to increase at pre-crisis rates instead of floundering.

Full article on Wall Street Journal

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