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Economic and monetary challenges - Juncker Plan: first lessons from the past six months?
An investment plan for Europe. The quest for additionality
The main policies conducive to a recovery of investment are those in the fiscal, monetary, financial or regulatory areas that create confidence, stability and higher real growth expectations to spur investments by the private sector. But also promotional banks might play a role in an Investment Plan for Europe based on their catalytic effect and their ability to help match supply and demand for funds in a context in which: (i) commercial banks have greater limitations to finance longer terms, (ii) the emergence of a more capital market based financing and (iii) a fiscal consolidation drive that calls for more public private partnership (PPP) in infrastructure, green and innovation financing.
However, for the catalytic effect to translate into additional investment it is necessary not just more risk bearing capacity by a promotional lender like the European Investment Bank (EIB) supported by the EU budget through the European Fund for Strategic Investments (EFSI), but crucially this greater risk appetite has to effectively translate into financial subordination to other investors, especially in the area of project financing. Otherwise, in a system flooded with liquidity, EIB/EFSI activities risk creating market and competitive distortions vis-a-vis national promotional banks and private lenders.
A smart use of the greater risk bearing capacity of the EIB could be to leverage on past experiences like the so called project bond initiative which resembles the US model for catalyzing financing for PPP infrastructure projects under TFIA. These schemes, by means of providing subordinated loans or guarantees, achieve that complex infrastructure projects are able to generate more predictable cash flows that can be investable by capital market actors like pension funds or insurance companies. By allowing these projects to tap an additional source of long term funds to the traditional and currently constrained bank market, they might create real additionality to the EU economy.