Sleep-walking



 1 June  2015 (MAGAZINE)

 

Letter from Brussels

BY JEREMY WOOLFE

 

Awaking a sleep-walking economy

A few more European cross-border lending opportunities have started to emerge. This follows anticipation of the European Investment Plan launched by European Commission president Jean-Claude Juncker. Brussels fears that it will face a threat from its political opponents if it does not kick life into Europe’s stagnant economy

 

The current focus is on the European Investment Bank (EIB). The institution, owned by the EU member states, approves projects that help unlock financing from other sources. It recently announced four projects in anticipation of clearance through Brussels of the European Fund for Strategic Investments (EFSI) regulation, which covers the Juncker plan.

They comprise Grifols Bioscience, of Barcelona, with an EIB loan of up to €100m to support R&D; up to €72m towards primary healthcare care centres in Ireland; up to €100m to the Arvedi Group steel producer in north-east Italy, for modernisation; and up to €32.5m towards a Dubrovnick Airport development, in Croatia. With piggy-back support, the total investments add up to €856m.

Werner Hoyer, EIB president, said at the launch of the projects that the number of schemes would increase considerably in coming months and emphasised that speed was the priority.

Juncker’s investment plan envisages the EIB injecting about €15bn a year in additional investment in crucial areas over 3-4 years. The total, including external funding, would be €315bn. Infrastructure is the focus, in particular broadband, energy networks and transport infrastructure. Also included are education, research and innovation, renewable energy and energy efficiency.

Among institutional investors, enthusiasm for the programme comes from Henk Eggens, CIO at Aegon Asset Management. He tells IPE that the EU initiative “fits with our strategic plans to invest more in alternative asset classes like infrastructure, research, sustainable business and small and medium-sized enterprises (SMEs). It supports our search for yield”.

Further support for Brussels comes from Han van der Hoorn, a policy adviser at PGGM. He says that although there is no shortage of finance, “it does not always find its way into investments that are crucial for the future of Europe”. But he warns that, with many institutional investors already having significant EU home bias, this limits an increase into EU positions.

At the EIB, a sign of urgency is that it plans to add “some hundreds” to its current staffing level of 2,000. This is partly to cope with smaller projects, for SMEs. Here, a similar-sized professional team at the bank is needed to clear due diligence, as for larger projects.

Background to the EFSI programme is spelled out by the EIB, which argues that Europe is facing a structural crisis of competitiveness, which the financial crisis has aggravated: “Europe has experienced a two-decade-long decline in competitiveness  and depressed growth,” the EIB notes in its February 2015 paper, ‘Restoring EU Competitiveness’.

“Low comparative productivity and misallocation of investment, alongside many structural weaknesses, help explain why the global crisis hit Europe so hard, and why EU-wide recovery presents such a challenge,” the paper continues.

The EIB’s analysis, which concentrates on long rather than short-term economic performance such as the windfall boost from low oil prices, outlines concerns that, since 1990, the gap in GDP per head between the EU and US has roughly doubled.

In the EU, patent applications per inhabitant are only at about one-seventh of the levels for the US and South Korea. On education, the paper notes that Europe has as few as three universities rated among the top 20 in the world. Regarding venture capital financing, while this stood at about 0.2% of GDP in the US, it was less than 0.05% in European countries.

Overall, the tragedy is that the EU economy has been sleep-walking towards decline.

Regrettably, this attempt to resuscitate it is not the first. The Lisbon Agenda of 2000, which set out to make the EU the world’s most competitive and dynamic knowledge-based economy, went largely unheeded by member state governments.

Similarly the 2003 Sapir Report drawn up by leading EU economists was shelved. Some member states objected to performance-based criteria being applied to R&D budget allocation.

Apart from the investment plan, the Commission says that it is working on other “multiple priorities”, including the Capital Markets Union reform programme. The aim would be to deliver results before the present Commission’s mandate ends in 2019.