The Sustainable Europe Investment Plan – the investment pillar of the European Union’s ambitious Green Deal – aims to raise a trillion euros to tackle climate change and other environmental issues over the next 10 years.
At around 0.6 per cent of GDP, that could boost EU growth significantly. But there is very little, if any, fresh money involved. So how much additional spending and investment could be triggered?
Half the trillion euros is supposed to come from the EU budget. But the budget was around 150 billion euros last year and cannot run a deficit. Negotiations for 2021-27 are already proving difficult and, whatever the final figure, it will mean re-allocating existing spending to new areas with little or no additional investment.
Raising the other half of the trillion euros appears to be based on the blueprint of the European Fund for Strategic Investments – the 2015 ‘Juncker Plan’.
Like the green investment plan, the Juncker Plan was based on complex leverage: an initial seed of capital and guarantees, diverted from the EU budget, is leveraged up twice – first by the European Investment Bank borrowing money from the market, second by private investors. That way, each euro of seed money was meant to generate up to 15 euros of investment.
The EC estimates that investment under the Juncker Plan increased EU GDP by 0.9 per cent, closing the bloc’s investment gap and adding 1.1 million jobs. By 2022 the estimate is for 1.8 per cent additional GDP and 1.7 million jobs with Spain, Finland and Greece benefitting most.
But while the idea was for the EIB to fund riskier projects, evidence suggested this was not always the case.
Other factors may also have lifted investment, including an overall recovery, weaker euro, higher profits, and quantitative easing. Even so, we still estimate that the Junker Plan helped unleash private-sector investment potential, and about half of the investment generated was additional to what would have happened anyway. That equates to roughly 0.5 per cent of additional GDP in the last four years.
So what lessons does the Juncker Plan offer for the green investment plan? As we think the EU budget will create little extra investment, the focus should be on the part financed outside the budget.
The funds and guarantees made available by InvestEU and financing from the EIB could trigger just over 500 billion euros of investments by 2030 – roughly 3 per cent of EU GDP. Assuming a similar impact to the Juncker outcome, about half of that could be above what might have happened anyway, equivalent to 0.1 per cent-0.2 per cent of GDP a year for the next decade, with a similar impact on GDP growth.
One caveat is that the need to attract private investors makes it less suited to address the investment shortage in training, education or large infrastructure projects – areas relevant for climate change and important for potential growth.
Meanwhile, the EC is consulting on changing the fiscal rules to give countries more flexibility. However, there is no consensus on what the changes should be.
But tackling climate change could provide a catalyst for allowing certain countries more flexibility in meeting the rules – with the understanding that, to achieve some of the European Green Deal’s ambitious goals, at least some funding is made available, which could provide an additional small boost to growth.
First published 24 February 2020.
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