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The European Commission’s new president, Jean-Claude Juncker, has put public investment back on the agenda with his idea of a three-year €300 billion ($378 million) capital spending plan. The European Union’s leaders are expected to discuss his proposal in December.
For starters, this is not the first time that Europe has considered such an initiative. In 1993, the Commission, under Jacques Delors, proposed a capital spending plan in its White Paper on growth, competitiveness and employment. The plan was broadly endorsed, but no action was taken. Likewise, in 2000, as part of its Lisbon Strategy, the EU sought to increase national spending on research and development to 3% of GDP. It failed to reach this target. More recently, in June 2012, EU leaders adopted a Compact for Growth and Jobs that was supposed to mobilize €120 billion. The check is still in the mail.
It is indeed easy to pretend to act without taking effective action. One way is to ask the European Investment Bank (EIB), the EU’s development bank, to lend more. Such calls face two limitations: the EIB itself is careful not to jeopardize its financial rating by taking on too much risk, and its loans easily substitute for private financing. More lending therefore can be pointless if it results in the EIB crowding out private financing of the best available projects. A bridge financed by the EIB may be more affordable than one financed by capital markets, but it remains the same bridge and has the same economic impact. The size of the EIB’s balance sheet is not a good measure of its effectiveness.
Instead, three investment levers should be used. The first lever is budgetary: Governments that enjoy fiscal space should spend on economically sound projects. Public investment is a complement to private investment; if designed and targeted well, it can trigger more private investment, rather than crowding it out.
Full article on Project Syndicate