European Commission’s Economic Recovery Plan

Barriers to investment in Europe have little to do with the lack of financing. Europe is gripped with a misguided investment mania.

The new European Commission’s economic recovery plan is based on increasing investment by 315 Euros over a spread of three years. The plan is considered to be the signature plan of the new President Jean-Claude Juncker. However, the plan is highly vague considering its over-emphasis on investment and financing structure.

• Eurozone is faced with an endless recession which has led the public to believe that more investment is needed to put the economy back on track as it will raise capital and output. The authorities have come to believe that the Eurozone is suffering from an “investment gap”. This assumption rests on the comparison the officials are making with 2007 conditions which presents a shortfall of 400 billion Euros.
• 2007 was the year when the credit bubble was at its zenith which led to massive wasteful investment. Even if the comparison is done with pre-credit boom years it will not be appropriate as the demographic structure of Europe has remarkably changed. Although Europe’s working-age population has been growing till 2005, it will now start falling in 2015. This will mean lesser number of workers who will be able to maintain lower growth rates. The latter can thus be sustained with less investment to maintain balance with capital-output ratio. If the capital exceeds output due to more investment, there will be lower returns on capital and an increased number of non-performing loans in the economy.
• European market signals suggest that there is no funding crunch. The Juncker Plan will add 21 billion Euros into EU economy in which banks already have more than 1 trillion Euros in capital. Thus, the impetus will not have any significant impact on bankers decision to finance investments. Moreover, the Plan aims to boost the infrastructure projects which are highly risky mainly due to policy bottlenecks and changes. The latter have no link to the funding or investment made.

There is still a lack of initiative and willingness in European governments to push forward many projects which are not stalled due to any lack of funding.            The recoveries of major economies like US and UK have been fuelled by an increase in consumption and not investment revival. It is time EU takes lessons from them.