EU ministers are gathering in Luxembourg this week to discuss a €300 billion growth package. €300 billion is a dazzling amount but throwing money at a problem is not enough to solve it, experiences from previous EU stimuli packages show us. The ambition this time around should be to do spend the money more effectively, writes Xavier Sol.
The growth package “to boost jobs, growth and investments” is at the core of Jean-Claude Juncker’s priorities as the new president of the European Commission. Voices in EU capitals such as Paris, Rome and Warsaw have been expressing enthusiasm for this idea.
However, this is not the first attempt by the European Union to get the economy going again by injecting big cash via the European Investment Bank (EIB). The EIB has been asked twice to boost its lending in 2008 and 2012. Consequently, its capital has been increased, and in tandem with the European Commission it has developed financial instruments to mobilise money from the EU budget and private capital to be used towards SMEs, energy, infrastructure and the automotive sector.
The debate on the upcoming package so far has not moved beyond numbers and cutting red tape. Clear conditions and priorities for qualitative investments are still lacking. What is clear though is that the EIB will get a central role in managing future investments. It is crucial then to learn from previous attempts in order to avoid repeating past mistakes.
Juncker’s focus on infrastructure investments is actually an old recipe to stir growth by creating jobs and improving competitiveness. Unfortunately, what kind of infrastructure we need is a question which remains unanswered too often.
A look at Europe’s top priority projects informs us that fossil fuel infrastructure is still dominant (27 gas vs. 6 electricity projects). But as gas demand is falling and energy efficiency targets are tightened, the EU largely overestimates the needed investments in gas infrastructure, a recent study shows. If the projects are carried out as planned billions of euros may be wasted on stranded assets in the form of useless gas infrastructure.
While the EIB has increased its investments in renewables it has also still has over $11 billion of active investments in fossil fuel projects. These investments are not only swallowing billions that could go to renewables, smart grids or energy efficiency. They also impact the environment and undermine coherence with the EU 2050 roadmap to decarbonisation.
These infrastructure projects are increasingly financed through so called innovative financial instruments. Those instruments are designed to turn risky investments into safe havens for risk-averse private capital. This is a way to leverage more money. But if things go wrong, public money has to cover the loss.
The EU Project Bond Initiative (PBI) is such an instrument. It was first used to raise €1.4 billion to re-finance a gas (again!) storage facility in Spain. The first gas injection into the facility caused hundreds of earthquakes in the region and the project had to be cancelled. Instead of the project promoter or the bondholders, it will be Spanish citizens who will have to repay the debt.
The PBI was created to spur growth and make priority infrastructure investments happen. The outcome is quite the opposite. The project will not see the light of day and the PBI has saddled Spain with an additional €1.4 billion in debt. Moreover, the pilot projects focused largely on motorways and gas infrastructure, not exactly the kind of projects which will catalyse the transition to a low carbon society which we need so badly.
Socialising risks and privatizing profits has been at the core of the crisis. Financial mechanisms that don’t intend to strike a fair balance between these poles are likely to make things worse. New mechanisms - which Juncker already confirmed will be developed – should also be targeted at sustainable projects to guarantee genuine investment in our future.
Transparency and accountability are preconditions for good governance and thus indispensable guarantees that those €300 billion are spent as good as possible. Worryingly, however, the EIB was ranked second to last as a multilateral organisation when it comes to transparency in last week’s Aid Transparency Index. The other European bank, the European Bank for Reconstruction and Development (EBRD), fared worse.
The new Commissioner Frans Timmermans, who is expected to be the first vice-president of the new Commission, has already committed to make transparency a priority during his hearing in the European Parliament. Central to his agenda should be the EIB’s transparency policy, which is currently being reviewed at the institution. Despite its under-performance on that matter, and numerous calls by the European Parliament to improve it, the EIB is surprisingly proposing to further downgrade its transparency policy by including more exemptions to its information disclosure practices.
What seems safe at first sight can drag you down quickly, the crisis taught us. Project Bonds, which is now being presented as a new medicine, could end up having the same effect. We don’t just need more projects, we need good projects that are future proof. And finally our money should be managed in a transparent manner under stringent democratic oversight, only then the public interest can be ensured.
The EIB has been portrayed as a miracle bank because it allows considerable investments without putting national budgets further under the pressure. But the bank’s results and accountability are far from miraculous. If EU ministers are serious about moving beyond the crisis they would better start thinking about how the 300 billion could be spent well. Currently the EIB is simply not up for the task.