The Juncker Gambit

Juncker is taking a gamble. Creating this new investment fund was a signature promise to voters in the European election, and now he is putting a proposal to EU member states that they may not like because of it arcane structure of funding. No one really knows if the new investment mechanism is going to work. There is an investment gap in Europe but it is smaller than the Commission thinks and it is not necessarily lack of capital that is the problem. Companies in Europe are well-capitalised but they are not investing enough because they doubt there is a payoff. They are not going to be persuaded to invest more just because the Commission is prepared to take the initial risk. They need to see a better outlook for general demand in Europe and for the conditions to do business. Investment usually raise the growth path of an economy but that is a process that works in the medium and long term, but not in the short term. What is needed in the short term is an injection of central bank money that help to lift demand – and structural economic reforms that improve the capacity of business to compete and generate new output.

It will also take a couple of years for the new investment programme to be rolled out. You sometimes get the impression that there are shovel-ready projects with high economic payoff just waiting around the corner, but that is not the case. The European Investment Bank is currently trying to finish the new injection of investments resources that were decided in 2011 – and even if the new mechanism should allowed to invest in projects that don’t come with top credit ratings, it will operate over three years. So don’t hold you breath for a quick recovery in Europe on the back of Juncker’s new gambit.

Juncker said in his speech today that Christmas is coming early. That gives false impressions. But the good news is that the plan just not envisage throwing a lot more investment money into the economy – it is also based of fast-pedalling necessary structural reforms in sectors that will be targeted for this new investment money, e.g. telecom infrastructure and energy inter-connectors between EU countries. While there is a risk that such investments may crowd out investments that the corporate sector would do, it is the right choice to combine investments with reforms. The economic payoff of new investment is much higher in competitive markets. And there will be a higher degree of support for new public investments if it also ushers in more reforms in Europe. Those countries that need investments, and that cannot find money for them domestically, are usually the countries that have the most regulated markets.

If it gets off the ground, the new resources should be invested in infrastructure and research and development. Juncker and his colleagues have been talking about support investment in small and medium-sized companies and in corporate innovation. That won’t work. Bureaucrats are not good at “picking winners” and the closer that government gets to the real life of companies and markets, the biggest the waste will be. However, improving the general conditions for business, through investments in transport infrastructure or in research, will lift Europe’s growth trajectory, not by much, but even small changes is needed now as the EU fights against stubbornly high unemployment and a public that is getting increasingly impatient with political leaders that don’t address the core economic problems of our time.