On 10 March, EU finance ministers agreed to roll out Jean-Claude Juncker’s flagship investment programme, commonly termed the ‘Juncker plan’. Harald Sander writes on the economic impact the plan could have in the Eurozone. He argues that while it has been portrayed by some observers as a route to helping the Eurozone’s recovery, it will require far more than the Juncker plan to stimulate growth in Europe’s ailing economies

Sander, Harald

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Jean-Claude Juncker, Credit: European People’s Party (CC-BY-SA-ND-NC-3.0)19/03/2015The ‘Juncker plan’ does not oﬀer a genuine route to boosting theEurozone’s recoveryblogs.lse.ac.uk/europpblog/2015/03/19/the-juncker-plan-does-not-oﬀer-a-genuine-route-to-boosting-the-eurozones-recovery/On 10 March, EU ﬁnance ministers agreed to roll out Jean-Claude Juncker’s ﬂagship investmentprogramme, commonly termed the ‘Juncker plan’. Harald Sander writes on the economic impactthe plan could have in the Eurozone. He argues that while it has been portrayed by some observersas a route to helping the Eurozone’s recovery, it will require far more than the Juncker plan tostimulate growth in Europe’s ailing economies.The €315 billion European investment initiative – the so called ‘Juncker plan’ – was accepted by EUﬁnance ministers on 10 March and is expected to go operational as a new “European Fund forStrategic Investment” (EFSI) by mid-2015. Is this ﬁnally good news for Eurozone recovery? Unfortunately, theJuncker plan has been widely misunderstood as a recovery programme for the crisis-ridden Eurozone: it is in fact nomore and no less than a (welcome) investment initiative for Europe.The Juncker plan is not a Eurozone recovery programmeWhat is the oﬃcial rationale for the investment initiative? The European Commission cites a lack of total (public andprivate) investment of about €230 billion to €370 billion below the historical norm for the EU28. This gap is viewedas the key reason for the slow recovery of both the EU28 and the Eurozone.Consequently, the commission points out that the Investment Plan for Europe has three objectives: “to provideadditional fuel to the EU’s recovery and reverse the drop in investment; to take a decisive step towards meeting thelong-term needs of our economy by boosting competitiveness in strategic areas; and to strengthen the Europeandimension of our knowledge, human capital and physical infrastructure, and the interconnections that are vital to ourSingle Market.”Although one listed objective is fuelling Europe’srecovery, the Juncker plan should not be misread asthe much sought after ﬁscal stimulus, famouslydemanded by Mario Draghi to provide the third pillarfor getting the Eurozone back on track, next tomonetary policy and structural reforms.First, there is an obvious ﬂaw in the Commission’sdiagnosis. The fall in total investment is heldresponsible for the lack of recovery, but the role ofausterity is completely ignored. By contrast, SimonWren-Lewis has recently presented a counter-factualestimate that GDP in 2013 might be around 4 percent lower because of austerity measures. A newCEPR paper suggests a similar negative growthimpact from austerity policies and predominantlyidentiﬁes cuts in government transfers as the biggestcontributing factor, not investments.Second, what is really required is a net ﬁscal1/3stimulus. Additional ﬁscal and private spending is key in a repressed economy where spending multiplier eﬀects arehigh. However, the 21 billion euros for the Juncker plan are ﬁnanced by reallocating, not by increasing ﬁscalspending. And it is doubtful whether the plan will really trigger additional investment worth €315 billion.Third, an increase in private investment is not necessarily a solution as it also increases supply. In many Eurozonecountries the problem is not a lack of supply but a lack of demand, i.e. excess supply. The best one can do undersuch circumstances is to replace relatively ineﬃcient capital goods with more eﬃcient (e.g. more environmentalfriendly) ones, as suggested by Pisani-Ferry.Fourth, and in a similar vein, the focus on private investment can therefore be misleading when the main objective isto revive the European economy. Daniel Gros thus argues in favour of a focus on consumption spending and pointsto the example of the United States and the UK, where investment has followed consumption growth.Fifth, the plan explicitly does not focus on problem countries. According to Bloomberg, “EU Commission VicePresident Jyrki Katainen said the plan must resist pressure to steer help to needy regions or nations.” In fact, it is aplan for all EU28 countries. And yes, it will favour the large countries, which will contribute most to the fundingthrough their respective national promotional banks and consequently receive most of the investment funding inreturn. In sum, the Juncker plan is not the big push on public investment, for which the case is so overwhelming in azero-interest-rate environment.The Juncker plan as an EU investment initiativeWhile the Juncker plan might do little to bring about a Eurozone recovery, it should nevertheless be welcomed as aninitiative for raising public and private investment and thus long-term competitiveness in the EU. Moreover, it canand should be used as an instrument to promote European integration and institutional development.In particular one should mention that: the diverted money from other activities is used as a guarantee and maytherefore have a leverage eﬀect up to 15; it will establish new institutional structures to promote investments inEurope through the new EFIS; it could have positive eﬀects on promoting the single market by approximatingregulation; it could give the creation of a European capital market union an additional push. Of course, theseenvisaged beneﬁts come with caveats, which have been broadly discussed in the past months, such as the well-known debate over whether the estimated size of the leverage factor is exaggerated or whether additional projectsare being triggered.Another line of criticism holds that unpredictability and diﬀerences in regulation are more important barriers to(cross-border) investment than the availability of cheap ﬁnance or the lack of ﬁnancial guarantees. Often bad ﬁnanceis not the problem, but a lack of projects with a suﬃciently high economic return. But rather than an argumentagainst the EFIS, these concerns just point to what should be done additionally on regulation and on diagnosingwhat holds back investments in diﬀerent countries – e.g. by using a diﬀerentiating growth diagnostics approachrather than one-size-ﬁts-all recipes. Finally, one should note that money is being diverted from other activities,namely Horizon 2020, which has prompted European universities to protest.What would a genuine Eurozone recovery plan look like?The Juncker plan should be welcomed as a long-run strategy to address investment weakness and to promote(green) growth in Europe. But since Lord Keynes constantly reminds us that in the long run we are all dead, it mustbe made crystal clear that the plan does not solve the Eurozone’s current economic problems.A ﬁscal pillar of a Eurozone recovery plan would look quite diﬀerent and there is widespread consensus amongmany economists as to what it would entail: ﬁscal stimulus from countries that can aﬀord it, the return of the goldenrule of public ﬁnance at the national level, which allows for debt ﬁnance of public investment if required, thus givingmore ﬁscal leeway beyond the Maastricht rules, and an additional boost in European/Eurozone public investment.2/3Please read our comments policy before commenting .Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, norof the London School of Economics.Shortened URL for this post: http://bit.ly/1BRhFwv _________________________________About the authorHarald Sander – Cologne University of Applied Sciences / Maastricht School of ManagementHarald Sander holds a Jean Monnet Chair and is Professor of Economics at Cologne University ofApplied Sciences and at Maastricht School of Management.3/3

The ‘Juncker plan’ does not offer a genuine route to boosting the Eurozone’s recovery

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