Economics, EU – Baltic States, Financial Services, Forum, Investments, Legislation, Markets and Companies

Growth in EU-28 is not as good as it is supposed to be: it is improving, stability has come back, but things are not improving as fast as they could be. The main reason is structural weaknesses in European member states’ economies. It means in some countries better commodity markets, in others reforms in labour markets and public welfare systems. It may mean as well municipality reforms and more efficient energy sector to lower energy prices, etc.

Annual Growth Survey

The Commission presented Annual Growth Survey, analysing the member states economies, their strengths and weaknesses, as well as identifying main investment obstacles in each EU state.

Some of the findings ended up in the Country Specific Recommendations which all states have to respect and deliver next year and the year after.

The first priority on the way to improve investment in Europe is to understand the ways the world has changed, while reforming EU economy to be more suitable to future needs. Here the Investment Plan for Europe represents a structural reform on a Europe-wide manner. The Commission thinks that structural reforms and the Investment Plan are moving in the right direction and actually quite fast.

Deepening and widening the Internal Market

The first pillar in Investment Plan is EFSI, the European Fund for Strategic Investment. The basic idea behind the fund is to provide risk financing, mostly for private investors: the basic philosophy is to address the situations in the EU market failure. There's plenty of liquidity, but risk financing is something that's missing to a large extent, partially, because of an underdeveloped capital market in Europe. In the meantime, the Commission has to address the acute problem by providing risk financing to investors.

In the second pillar of the Investment Plan there are two major initiatives: the first one is European Investment Advisory Hub. It means a one-stop-shop for private investors, but also for public authorities if they want to get advice on how to use EU's financing facilities or how to improve the quality of their projects in order to be more attractive in the eyes of private financers. The Commission has collected expertise from the European Investment Bank in order to help people to get technical assistance for their projects.

The second element in the second pillar is the newly created the European Investment Project Portal. The idea came from the UK’s investment bankers, which with plenty of liquidity were willing and capable to invest in European infrastructure. However, they say, sometimes it's very difficult to find good projects; hence the need to establish a platform to which project promoters could send their projects and by doing so, they would have better visibility in the eyes of the investors. Since this initiative has been disclosed on 1 June, there are already over 100 projects in the portal. Besides, this part of the Investment Plan has been of interest to the 3^rd country investors; sovereign wealth funds from these countries are also interested in the European Investment Project Portal.

The most important part of the Investment Plan is its third pillar: deepening and widening the Internal Market, which is also a part of a European structural reform. Having a relatively well-functioning EU internal market; however, several spheres are lagging behind, e.g. in digital goods and services with plenty of national obstacles. For example, there are still 28 national regulations on copyright and almost 28 different VAT regimes: some digital products from one member states cannot be legally used in another country. That is the reason why Commissioner Andrus Ansip is proposing concrete measures to address those investment barriers.

The same things are happening with capital market: the first result of the Capital Markets Union was changes in the Solvency II framework which means in practice that there are lower capital charges for insurance companies if they invest in infrastructure. Commission expects that this change would increase capital flows to productive infrastructure projects.

Commission also proposed creation of a transparent and simple securitisation market in order to improve corporate financing in EU. As is known, Europe’s economy is very bank driven. Due to the fact that bank regulation has changed, it has led to the situation where some banks – because of this reason – are more risk averse than before. That is why there is a need to further develop EU capital market and properly address the situation.

Among other Commission’s initiatives are “circular economy” package, Energy Union initiative and decarbonisation of transportation: they all are moving forward in order to create a Europe-wide regulatory environment. It basically means that the Commission is creating new markets for European consumers, producers, industry and entrepreneurs believing that by making business easier, one can stimulate growth.

One of the success stories of EFSI has been SME financing. EFSI has already signed 185 agreements with mostly commercial banks, but also national promotional banks and venture capital funds. This is supposed to provide financing to around 150 000 European SMEs. In Italy, there are 27 banks which have signed an agreement and if everything goes as planned, will provide financing to 44 000 Italian small and medium-sized companies.

Especially equity type of financing seems to be a scarce resource in Europe, argued Vice-President J. Katainen, and this is something EFSI can provide through intermediaries. The Commission is planning to establish a new venture capital fund of funds which is bigger than the ones at present. It's supposed to encourage the venture capital activities in Europe, especially to encourage increasing the size of the funds; these are significantly smaller than the ones in the United States.

Challenges regarding EFSI

There are two concrete EFSI challenges: the first big challenge is the lack of awareness about EFSI, how it can be used and at whom it's targeted. In many EU states there's an understanding that EFSI is providing financing to large public projects. The other misunderstanding is that it's very complicated and bureaucratic and if a company wants to apply for resources, it needs public sector approval. This is great misunderstanding: e.g. EIB as a bank has individual clients, thus everybody interested in opportunities can meet people at EIB's local branches and there's no need for public sector approval.

The second challenge is to use EFSI for smaller projects, because EIB cannot deal with a huge amount of smaller projects. Apart from SME financing, there's a possibility to create investment platforms, which can collect together a big amount of smaller size investment projects. For instance, in France (region of Île-de-France) a platform was established together with a private bank to collect 40 000 houses in order to retrofit them to reduce the energy consumption of the houses. EFSI is part of this platform, providing long-term loans to house-owners who will pay the loan back over time. The same model could be copied to other countries, for instance in Greece or Cyprus in the tourism sector or in whatever area of business there is a need for this.

There is no magic wand to boost economic growth or investments in Europe, argued Vice-President J. Katainen. The Commission is already providing risk financing, technical assistance and advise to investors; it has established a platform that will give better visibility to good projects. Besides, the Commission is pushing forward with Europe-wide structural reforms in order to create a better market while encouraging EU states to necessary reforms. The EU has to be competitive again and there is no reason why this could not happen in the near future.

Source: European Commission, speech by Vice-President J. Katainen at Brussels Economic Forum, 9 June 2016, in:

http://europa.eu/rapid/press-release_SPEECH-16-2125_en.htm?locale=en