Mariana Mazzucato and Caetano Penna*
Today the European Commission’s president Jean-Claude Juncker announced a €315bn investment plan for Europe, that will leverage funding from the European Investment Bank (EIB) through a new financial entity: the European Fund for Strategic Investments.
Oh, but wait. It’s not actually a €315 billion investment plan. On closer scrutiny the EU is only planning to relocate existing money into a new fund (€21 billion from existing budgets and the European Investment Bank, part of it being money that was already going to Horizon 2020 investments in innovation). The EU then hopes to achieve a leverage ratio of 15 to turn this €21 billion into an investment of €315 billion.
This is never going to happen. For the same reason another instrument, the European Stability Mechanism (ESM), never achieved much leverage from member states— the same states are also being asked to continue a mad austerity programme. On top of this, would €315 billion be enough? In the US, after the financial crisis, the Government invested 4% of GDP ($787 billion in the American Recovery and Reinvestment Act of 2009, which also directed investments to green areas via agencies like ARPA-E). Compared with this, even if Juncker manages to raise €315 billion that is still not enough. This is a massive missed opportunity because, with a serious investment commitment, the EU could today be on the road to recovery.
One positive aspect of the plan is the involvement of the European Investment Bank. While attention is usually on the European Central Bank, and its inability so far to act like a real central bank (by being lender of last resort, and allowing bond purchases), the attention now on the EIB means, hopefully, that we also understand that even when quantitative easing (QE) begins in Europe, it will not be enough. Funds must be ‘directed’ towards the real economy—so the new money created doesn’t just end up in the coffers of banks. So let’s leave aside for a moment the actual leveraging. Why is it good to start worrying about the EIB and not just the ECB?
At a moment when growth in European economies is faltering, national budgets are constrained by austerity measures, private investors are lacking Keynesian ‘animal spirits’ – and, at the same time, solutions to pressing problems such as ageing, youth unemployment, and climate change require a massive amount of new investments. Europe needs the EIB to become part of the select group of State Investment Banks (SIBs) that increasingly promote strategic investments that are targeted to specific areas, with the aim of promoting smart (innovation-led), sustainable, and inclusive growth.
As we explain in detail in a recent paper, the enhanced activity of SIBs is a counterforce to the retreat of the private financial sector from funding the real economy. The ‘short-termism’ of the financial system has been accompanied by the increasing ‘financialisation’ of business enterprises, the financial departments of which increasingly became main profit centres, to the detriment of core operational activities. The 2007 financial crisis made these decade-long processes evident, by revealing the fragility of speculative financial markets and of financialised business enterprises.
Recent years have therefore seen SIBs increasing their role in areas where private finance fears to tread. This is most evident in the emerging ‘green’ economy; world-wide investments aimed at the global challenges of limiting carbon emissions. According to data compiled by the Climate Policy Initiative (Figure 1) in 2012, the share of development finance institutions (that is, SIBs) in the ‘climate finance landscape’ was 34 percent (the highest share of any single type of actor), compared to 29 percent for project developers (including state-owned utilities), 19 percent for corporate actors, 9 percent for households, 6 percent for all types of private financial institutions and 3 percent for executive governments (investments from governmental budgets). Data from Bloomberg New Energy Finance shows that Germany’s KfW, China Development Bank, and Brazil’s BNDES are the most active state investment banks engaged in this kind of ‘mission-oriented’ finance for green energy (Figure 1), as indeed we heard at a recent Mission-Oriented Finance for Innovation conference that we organised in London this year. Other areas where SIBs promote mission-oriented investments include health and pharmaceutical sector, climate and environmental protection (beyond green energy), regional integration and inclusion of peripheral communities in the financial system.
Figure 1: State Investment Banks (‘development finance institutions’) are the single most important source of funding for climate change mitigation and adaptation projects
Source: Based on data from Climate Policy Initiative
Figure 2: State Investment Banks’ mission-oriented finance for green energy projects
Source: Based on data from Bloomberg New Energy Finance (BNEF)
The EIB has the potential to become one of the most important mission-oriented SIBs. Indeed, we believe that SIBs are very appropriate as funding sources for projects that tackle these new challenges (or missions). Because these are banking institutions, they are able to access the economic feasibility of projects, which is crucial if new technologies and innovative projects are to substitute for the old ones. Moreover, SIBs have traditionally supplied long-term finance (for capital-intensive projects, for example), and patient long-term committed finance is crucial for making new mission-oriented projects economically feasible. Banking institutions are also well-positioned to coordinate stakeholders, as part of the banking process is to establish relationships and build up a network with an array of actors (from government officials to corporate actors to consumers). The fact that SIBs have a vast portfolio of funding tools (equity, loans, grants, etc.) enables them to match the most appropriate finance to the project, whether it is incremental or radical (for example, equity or risk contracts for the radical innovation, loans to incremental innovation projects, grants to visionary R&D). Finally, SIBs have traditionally executed their roles in coordination with governmental policies, and new missions could potentially build on this important node in the governmental network.
Juncker has taken a step in the right direction by talking about investment and growth, not just structural reforms. He has also taken the right step in putting the EIB at the centre. Investment is what the Eurozone desperately needs, not the austerity we have heard so much about since the financial crisis. But if he wants this strategy to work, he needs to put his money where his mouth is. Increase direct investment, and provide the EIB with a strategy that goes beyond fixing ‘market failures’ to maximise the transformative impact of public investments to shape and create markets.
* Caetano Penna is a Research Fellow at SPRU, University of Sussex. You can follow him on twitter @Digitano
Tags: Austerity, Eurozone, Green, State Investment Banks
Our SPRU Working Paper – Beyond market failures: the market creating and shaping role of State Investment Banks