“Today Europe is turning a page. After years of fighting to restore our fiscal credibility and to promote reform, today we are adding the third point of a virtuous triangle: An ambitious, yet realistic ‘Investment Plan for Europe’. Europe needs a kick-start and today the Commission is supplying the jump cables.”
– Jean-Claude Juncker in European Parliament speech 2014-11-26
Yesterday, 26 November 2014, may go down in the history of the European Union as a historic date, comparable to the announcement of The New Deal in United States in the 1930s. The potentially historic event that took place was a speech in the European Parliament where the European Commission President Jean-Claude Juncker announced a €315 billion investment plan to kick-start confidence in Europe’s economy.
The New Deal
Hearing about the speech, I immediately thought of the New Deal in United States in the 1930s. The situation then was much the same, but worse. The World was stumbling to get out of the Great Depression and the United States economy was close to half the size of what it had been in 1928 (see table on the right).
The New Deal was a series of domestic investment programs in the United States between 1933 and 1936, initiated through laws passed by Congress as well as presidential executive orders by President Franklin D. Roosevelt.
The programs were in response to the Great Depression and focused on what economists and historians later called the "3R" of Relief, Recovery, and Reform. That is Relief for the unemployed and poor; Recovery of the economy to normal levels; and Reform of the financial system to prevent a repeat depression.
Judging by economic statistics, The New Deal was a success. It did not eliminate general unemployment and poverty, it took two decades of economic growth, much fuelled by the war economy spending in the 1940s, to do so, but The New Deal helped to achieve significant improvements.
Economic strength and development thrives on confidence and through the New deal, America regained confidence in her economic ability after the Wall Street Crash.
The period 1933 to 1939 witnessed a 60% increase in GDP and a 40% increase in consumer products bought. However the key indicator for economic recovery, private investment in industry, increased by 500% in just six years and this brought America back to economic strength.
The European New New Deal
In his speech yesterday, the European Commission President Jean-Claude Juncker gave details of a €315bn investment plan to kick-start Europe’s economy.
The plan includes smart financial wizardry to boost the investment potential of public funds without pulling Europe´s public economy´s further into debt.
At the heart of the plan is €16 billion euro in new investments from the European Unions budget and €5 billion from the European Investment Bank (EIB), creating a €21 billion fund that will provide guarantees for infrastructure projects. This means, the EU fund will not be used for actual projects but will offer risk protection for the EIB to raise a €63 billion fund from new bonds.
This will then allow the EIB to provide loans for the €63 billion fund as seed funding for projects. Given the normal ratio of seed-funding to risk funding in projects, this should enable creation of projects where the fund can be leveraged four times, creating an investment potential of over 300 billion euro, where the bulk of the money is private sector capital that can be invested with lower risk. The €21 fund will provide the EIB with first-risk protection if any project investment using the €63 billion fund goes wrong.
The plan would take the burden off national governments, already facing big debts after the financial crisis. But they could contribute to the fund if they so wish, and would be asked to come up with a list of projects with "high socio-economic returns" that would start between 2015 and 2017.
In his speech, Juncker´s detailed some ideas of what can be achieved through the fund:
Schoolchildren walking into a brand new classrooms equipped with modern computers. - European hospitals saving lives with new state of the art medical equipment.
- European households and companies benefiting from technological progress in energy-efficiency.
- Increased benefits from renewable energy sources.
- Europe-wide far reaching and faster broadband and data centres.
- Commuters charging electric cars on motorways in the same way as petrol stations are used now.
So will this work? The technologies for the infra-structure of the future is already there in the know-how of European companies like Ericsson, Siemens, Alstom, Asea-Brown-Boveri and others. However their primary markets for the latest technologies are right now exports to China and other high-growth markets. Can they find new customers in Europe through the new fund? Yes, most likely. The EU has prepared European cities and regions well in how to prepare public sector projects through the Horizon 2020 rollout.
But will the private sector money be there?
The private investment market is currently awash with money. In Bearing we get questions from private sector investors every week if we know good opportunities to invest in. The potential investment capital is there, but the private sector investors appetite for risky investments in Europe is low. Today they much rather invest in high-growth economies in Asia and Africa.
The new fund could change that and bring investors back to Europe.
This is the big test. Will private sector investors start to invest more in Europe where the economy is stagnating and confidence is low? The Juncker plan expects at least €252 billion from private sector investors.
If the fund succeeds in bringing confidence in Europe´s future back to the market, then it will work. If confidence in Europe will remain low, then it won´t. Like in the days of The New Deal, it is a huge gamble, but the European Union economies do not have much choice.
The Commission believes the plan could create up to 1.3 million jobs with investment in broadband, energy networks and transport infrastructure, as well as education and research. Putting this in perspective, it was reported in the news today that unemployment only in France has reached a record of 3 460 900 unemployed.
Below is a 90 seconds video by Financial Times, that explains the mechanics of the Juncker plan.