Newly-elected French president François Hollande has, thus far, remained steadfast in his desire to see greater fiscal reform at the EU level. Calling for more impactful growth initiatives, Hollande thrust his support behind European Investment Bank (EIB) loans, or Eurobonds, to fund large-scale infrastructure projects.
Eurobonds, which until recently remained publically toxic and relatively taboo for European leaders to discuss, would no doubt require difficult renegotiations of the treaty reinforcing fiscal discipline in the EU; something Hollande has signaled to his European partners he is ready to fight. Whether Hollande will realize these ambitions has yet to be decided.
What his position signals is that more debate amongst EU leaders as to the direction and manner they hope to inspire growth is yet to come. This is welcomed, if nothing more it will force leaders to debate solutions previously denied by policy rigorously guided by austerity measures. When asked about these shifts towards growth initiatives at a conference in Barcelona, Mario Draghi responded, “There is absolutely no contradiction between a growth compact and a fiscal compact. In fact, growth is sustainable in the long run if it is based on a variety of pillars, one of which is fiscal stability.” He continued by saying growth must be put back towards the center of the agenda. Growth which, according to the EU Commission, has been on the agenda for the last two years.
Europe 2020, as is commonly known, is a revamped attempt at the failed Lisbon agenda. In its inception, Project-Bonds were briefly mentioned in Barroso’s 2010 state of the union address, along with other grand gestures towards a greater growth agenda. Greater details of a plan for this specific initiative were announced early in 2011, which was then followed by a public consultation phase where-by several dozen parties responded to the idea of the project bond initiative. This initiative is vital, not because it is the solution to Europe’s long-term fiscal problems, but because it provides Europe with actionable plans, small enough to be executed, but with the potential for greater impact down the road.
The responses varied in their enthusiasm for the project, but generally concluded that the initiative was in need of some refocusing. It was felt that the Commission needed to ensure transparency throughout the projects—from the perspective of the public and member states, to how projects are selected, why they are selected, and the expected good such a project is expected to bring.
The Commission, already shrouded in opaque behind the scenes deals, needs to make a serious effort to keep all interested parties—from investors to member states, to the general public—abreast on all developments, political backlash not withstanding. Furthermore, the Commission must be realistic in the numbers it projects in terms of cost, possible capital leverage, and potential net benefit.
On the technical side, issues for investors stem from the lack of specificity by the Commission concerning the role the European Investment Bank would play. Who would be acting as controlling creditor behind the scenes? The Commission must be thorough in garnering support and understanding for the EIB to act as controlling creditor if that is indeed its intention. The EIB is hardly wanting in experience when it comes to infrastructure investing, but this conflict of interest still must be addressed. The suggestion by Freshfields, a global legal firm, where-by responsibility of controlling creditor is split between the EIB and an outside credible party, seems viable and certainly allays uncertainty for investors, especially in terms of staffing and resources.
From here, there are still several sub-issues that must also be concentrated on. What is the resource allocation strategy in terms of the countries and sectors? The answer certainly hints at a strong negative backlash. Certain member states will no doubt be left out of the equation in the pilot-phase as only 5-10 projects will initially be selected. Leaving this selection process to the EIB certainly doesn’t allay concerns by member states, project companies, and the general public. The EIB must be thorough in its analysis and explanation as to its strategy for selection and how they see the initiative playing a role in the long-term for future investment projects.
With any investment opportunity, there comes with it a certain amount of risk, especially large-scale infrastructure projects. The Commission however, must be commended for recognizing an opportunity to intervene on behalf of the greater good for the EU, using the current crisis as an opportunity for a ‘third industrial revolution,’ as many have come to describe the need for massive investment in new sustainable infrastructure.
“The choice should not be austerity versus growth. The choice is unsustainable short-term stimulus that will lead to a short-lived re-launch of growth versus sustainable long-term reforms that will make a difference over time. And our choice is very clear,” argues Barosso. “It is about investing in lasting sustainable growth while immediately addressing the most urgent issues and first of all unemployment that has reached intolerable rates.”
What one hopes is that enough European leaders will begin to stand up and take ownership on the failure to act decisively, thus beginning an attempt to set the EU on a path towards innovative sustainable growth. The Europe 2020 Project Bond Initiative, if transparent and thorough in its mandate, is a good step.