WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

Annually, the EU disburses EUR 180 billion EUR in the context of the traditional EU budget.  The bulk of these funds is used to finance both public and private investment. Given President Juncker’s investment initiative, the question arises “Why to draw up a new investment plan, if massive reserves are apparently tucked away in the traditional EU budget?” If we base our calculations on the 15-fold leverage that the Juncker initiative reckons with, one could arrive at much higher potential investment levels in Europe than the ones achieved currently, provided it is utilized along the principles of the new initiative. If this consideration is halfway realistic, then one of the most urgent tasks should be the transformation of the current EU budget along the parameters of the new initiative based predominantly on the application of financial instruments  and not predominantly on grants, as it is currently the case.

Current absorption rates of EU cohesion funds

In common with the highly developed core of the EU, the new Member States (NMS) suffer from an insufficient level of investment. Nevertheless, as biggest beneficiaries of the EU cohesion policy, several NMS have problems with the absorption of the ample resources available to them. Given the remarkable similarity of the typical projects envisaged under the new initiative and those financed by the Structural Funds, it is questionable whether the new line of finance can be appropriately utilized.                                         

Risk of low project maturity, mismanagement and corruption

There is also every risk of projects that failed with good reason to meet the requirements of the established cohesion policy framework being recycled and re-submitted for consideration under the new line of financing. As for the new initiative, speed is of the essence. However, it should be appreciated that, apart from obvious bureaucratic exaggerations, the current protracted decision-making process to which cohesion policy projects are subjected is a response to painful instances of mismanagement and corruption in the past. Whether the new initiative will be able to engender business investment is an open question.

Market-based financing for EU cohesion policy

However, a resolute shift to EU-sponsored, yet market-based financing from the currently predominantly grant-based financing will be a change that serves the longer-term interest of the NMS, as it will filter out unviable, prestige-driven projects tainted by corruption.

Background

Although both GDP and private consumption in the EU-28 Member States have re-attained their pre-crisis (2007) levels, total investment is still 15% below the volume recorded in 2007. The investment plan for Europe announced by the Commission President Jean-Claude Juncker at the end of 2014 is designed to remedy that problem. Within the context of the European Investment Bank (EIB), a new European Fund for Strategic Investments (EFSI) is taking shape. Its mission is to generate EUR 315 billion additional investment over the period 2015-2017 by making better use of public money and so attract private investors. The starting point is the fact, that the financial institutions and corporations dispose of sufficient liquidity, which, however, is not being put to productive use. The calculation is as follows: for every initial EUR 1 of risk-protection by the EFSI, EUR 3 of extra financing can be provided to a project in the form of sub-ordinated debt. On the assumption that this establishes a safety buffer for that particular project, private investors are expected to invest in the senior tranches of the same project. With an initial contribution of EUR 21 billion the Commission hopes to attain a multiplier effect of 1:15 in real investment.