November 25, 2014
Another leak, probably the last, since the decision will be made tonight. The FT has obtained even more details on Jean-Claude Juncker’s investment project, including a curious change in the headline total of the plan, which now stand €315bn. That plan will have €21bn in what the article calls “seed money”, but apparently it won’t be a first loss tranche – something that has raised our already heightened suspicions beyond infinity. There is also a name for the plan, which is different from the one we suggested yesterday, based on another newspaper leak. The working title is the European Fund for Strategic Investment, EFSI, though the article is careful enough to point that the name might change again at the last minute. Do don’t memorise this latest acronym yet.
The seed money will come in the form of a guarantee (which is what feared all along) - €16bn from the EU’s budget, and €5bn from the European Investment Bank. National governments could put up extra funds. Importantly, the article writes that the idea of a first loss tranche is out of the window, for now. So that leaves the €21bn as co-funding. The legal status of these funds are going to be important. If that number is right, that would suggest a leverage ratio of a dizzy 15 – and this without a first-loss tranche. The latter may be added later when concrete projects are announced, the article said. Subordinated loans, and equity investments could also be included. This is structural finance with a pre-crisis mindset – to create something out of nothing.
In anticipation of today’s decisions, there has been a serious and important debate going on whether European really needs investment. Daniel Gros thinks not. He did the math in a CEPS policy brief and concluded:
“…there are fundamental reasons to believe that the investment rate in the euro area will remain permanently depressed. The investment gap so often invoked is anyway much smaller than widely believed because any comparison with the peak level reached at the peak of a credit boom in 2007 is inappropriate. But investment rates in the euro area are likely to remain below the more normal levels of before the credit boom because the potential growth rate of the euro area has declined so much under the twin impacts of lower labour force growth (now turning negative) and a fall in overall productivity (a longer term trend whose root cause is difficult to ascertain).”
Over at Bruegel, Grégory Claeys, Pia Hüttl, André Sapir and Guntram Wolff also did the math, focusing specifically on the investment gap. On the basis of a linear trend from 1970 to 2005, without the bubble years that followed, the data show that investments are currently €260bn below this trend.
Our coverage focus heavily on Juncker’s investment plan; several authors also focused on the question, whether Europe really needs this investment; and has stories on the PSOE’s U-turn on Spain’s constitutional debt brake; a comment on Socialists losing out to far-right and eurosceptics; Spanish reactions to Munchau’s FT column; on Jose Socrates, who will remain in detention; on the growing rift inside Pasok; on the Greek delegation travelling to Paris for another round of troika talks; on regional elections in Italy, where the PD emerged victorious in two provinces – on an uncharacteristically low turnout; and a comment warning that the Irish banking inquiry is about preventing the next crisis not a political bloodshed.