After raiding Horizon 2020 funds, the European Fund for Strategic Investments is attracting private investment and on course to reach its €315B target. But the low risk projects it is financing are not wholly innovative - only one involves a research organisation
President of the Commission, Jean-Claude Juncker, has hailed a successful first year for the European Fund for Strategic Investments (EFSI) and announced it will be extended beyond its original three-year timescale.
The elaborate scheme, also known as the “Juncker Plan”, aims to unlock as much as €315 billion in private and public investment and use the money to spruce up digital, transport and energy grids.
Announced with great fanfare, the early response from economists was muted, if not dismissive. They especially doubted EFSI’s promise to attract private money with public funding with a leverage factor of 15.
Yet, according to a defiant Juncker, the scheme is “defying the pessimists”, and economists are having to eat their words.
“I thought it was way too ambitious,” said Francesco Saraceno, a senior economist with Sciences-Po in Paris. “But the data shows us it’s more or less on schedule to get €315 billion.”
“It’s been impressive and above my expectations,” Gibran Watfe, an economist at the College of Europe in Bruges said.
However, there are lingering questions about the quality of EFSI investments. Researchers were told to expect a lot of benefit from EFSI, after the fund scooped €2.2 billion from the Horizon 2020 research programme.
The rest of EFSI’s seed money was recycled from unspent bits of the EU budget and the Connecting Europe facility. The cash was shifted into a guarantee fund so the European Investment Bank (EIB), which houses EFSI, can be insured against potential losses.
The transfer of funds from Horizon 2020 to EFSI remains a bone of contention for researchers. “A big chunk of financing for Juncker’s ‘voodoo economics’ was at the expense of R&D in Horizon 2020,” said Hans-Olaf Henkel, vice-chair of the European Parliament’s research committee, ITRE. “For short term political gain Juncker sacrificed long term benefits,” he said.
So far, the scheme has supported 64 big infrastructure projects with €9.3 billion. These include a new milk-processing factory and broadband network in France, new ferries and smart meters in Italy, railways and money for supplies at a bioscience lab in Spain, renovation of a gas plant in Denmark, a new hospital in the UK and a bio-product mill in Finland.
Five projects involve investment in motorways; four offshore wind farms; two onshore wind farms.
“None of the projects involve universities,” Kurt Deketelaere, secretary-general of the League of European Research Universities, points out.
EFSI also targets small and medium-sized businesses through the European Investment Fund, a part of the EIB that focuses on start-up firms and smaller companies. It has signed guarantee deals with banks in several countries worth €3.5 billion.
Grégory Claeys and Alvaro Leandro, economists at the think tank Bruegel, believe EFSI has got off to a disappointing start. They question whether EFSI-funded infrastructure projects represent a higher risk than the EIB would normally take, which was meant to be the motivation behind EFSI.
“Is a new motorway really a risky project?” asks Claeys. “After all, you eventually recoup investment through road tolls.”
According to Claeys and Leandro, based on the information they could get the only project representing a greater risk than in EIB’s previous investment history is a titanium recycling plant in France.
“Even EFSI projects that look very similar to past EIB projects can have very different features,” a Commission source said, speaking on the basis of anonymity. “Take wind power. You can have two similar projects but one can be using a new, innovative technique.”
The problem, which the Commission and EIB acknowledge, is that it is not straightforward for the public to gauge how innovative EFSI projects are because this information is not in the public domain.
“This is the nature of banking,” said an EIB spokeswoman. “Details have to be confidential. Partners wouldn’t do business with [us] if they were public.”
ESFI projects 'would have been financed anyway'
Henkel doubts whether the economy will get much impetus from EFSI. “It seems that private companies used tax payers' funds to do what they should and would have done anyway,” he said. “Why should a large and successful company like Germany's Heidelberger Druckmaschinen wait for Mr Juncker to invest in digitalisation? They started to do so 15 years ago.”
David Rinaldi, an economist with the Jacques Delors Institute in Paris, said he believes that most projects presented so far “could have been financed anyway” without EFSI. He cites the broadband investment by Telecom Italia, Italy’s biggest phone company, as one example.
However, Nicola Nobile, an Italian senior economist with Oxford Economics in the UK said a lack of confidence meant ESFI was needed to jump start investment in the wake of the economic crisis. “The point is that these projects would have been otherwise financed through a normal expansionary fiscal policy but during the Eurozone crisis there was not any fiscal room for that – hence the necessity to revert to this kind of plan,” he said.
Net public investment in many EU countries has been low for years and especially since the financial crisis.
Leaping to premature judgement
An EIB official said it is too soon to judge EFSI, despite the self-congratulation in the Commission.
“The first year, it’s natural to go after the low-hanging fruit,” she said. “[But] we have a growing pipeline of projects now and expect that this trend will continue. This should translate into flagship innovative projects which otherwise would not have had easy access to financing.”
Rinaldi accepts the argument, saying he is, “Convinced that EFSI can speed up the adoption of [innovative] technology,” over time.
Nobile is positive too. “Our general sense on the Juncker plan is that it is without any doubt a positive step,” he said. "Given that most European countries have delayed infrastructure improvements in recent years, there is a substantial need for better transport links, power grid connections and medical and education infrastructures across the continent.”
Not a bazooka
Economists still maintain that EFSI is inadequate overall. “It is not the bazooka that the economy needs,” said Nobile.
“The size of the plan is ridiculous compared to the needs of the Eurozone,” said Saraceno. “It’s 1.5 per cent of GDP over three years. It will help, it certainly won’t hurt, but it won’t be a cornerstone of the recovery. This stimulus needed to come in 2009.”
Saraceno points to the US, which mobilised more than twice as much as the Juncker plan, in fresh money, at the beginning of the crisis. The American Recovery and Reinvestment Act adopted by the Obama administration in 2009 injected more than $800 billion into the US economy between 2009 and 2013.
Germany’s Herbert Reul, a centre-right politician, is pragmatic. “We’ve got too little investment in Europe and you’re not going to solve it with one instrument. But [the plan] is certainly better than a gnashing of our teeth,” he said.
MEPs give their verdict
MEPs voiced sharply contrasting verdicts on the progress of EFSI, during a plenary debate in Strasbourg on Wednesday.
The scheme represents “a reduction of debt through growth, not blind austerity, not suffocation [but] oxygen for SMEs,” said Italian MEP and head of the socialist bloc Gianni Pittella.
Several members cautioned that it was too early to call the scheme a failure or success. “As we say in Sweden, you shouldn’t shout hello until you’re over the river,” said Gunnar Hökmark, a Swedish centre-right MEP. “The fact that money has been spent is not a success as such. The remaining problem is that Europe still has an investment gap.”
In common with the view of economists, MEPs also questioned what EFSI is adding. “It is more likely that investments that would have taken place anyway are now eligible to wear the EFSI badge,” said Markus Ferber, a German centre-right MEP.
Some MEPs took aim at the poor geographical distribution of EFSI money. Most of the approved project have been in large EU countries, namely in France, Germany, Italy, Spain and the UK. As Dimitrios Papadimoulis, a member of the far-left bloc pointed out, his country Greece, which has suffered a long recession, has only benefited from one project.
Belgian green MEP Philippe Lamberts, said, "The plan should focus on countries that lack investments and investment capacity. Germany, which has chipped €10 billion into the EFSI pot, “has all the capacity in the world for investments," he added.
Belgium’s Gerolf Annemans, who sits on the far-right, said he remains deeply sceptical about the scheme. “It’s basically just a conjuring trick; a conversion of the loaves and fishes and the feeding of the 5,000,” he said.
Less talk of austerity
If EU politicians not belonging to Juncker’s centre-right family appear cautious about EFSI, they are grateful it has helped switch the conversation away from austerity, a strategy they say was too focused on more or less unsuccessful spending cuts.
EU states generally back the fund, not least because the money they put in will be deducted when the Commission assesses whether annual spending plans comply with the EU’s limits on budget deficits. And there is a lingering hope that China will chip in money.
Despite its relatively small firepower, economists hope EFSI can prod the EIB into backing more complex and innovative projects in the future.
Before, the bank was reluctant to finance anything high-risk out of fear of losing its triple-A rating. Under the Juncker plan, the Commission provides a first loss guarantee, reducing the risk for EIB.
Watfe believes EFSI has set a precedent for future EU schemes. “This move towards a more risk-based approach to EU money, I think, is a trend that’s here to stay,” he said.
The Commission has not said for how long it would extend the scheme, nor how much more money it would receive, saying it would make concrete proposals in the autumn.
It is presumed that if EFSI gets a second life it will need to top itself up with money, although this has not been agreed as yet. A Commission source said, “In theory, we could guarantee more projects with the same money.”
Dipping back into the EU budget would certainly be unpalatable for the Commission, whose officials still bear scars from the raid on the Horizon 2020 budget.
Nor would it be acceptable to researchers. “We agree with the fact there must be more jobs and investment in Europe,” said Deketelaere. “But this scheme can’t hurt Horizon 2020 again.”