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Financing Europe’s Investment

Speech by Vice-President Jyrki Katainen, responsible for Jobs, Growth, Investment and Competitiveness.

Published on: 01 December 2014

Conference “Financing Europe's investment and economic growth” Solvay Library, Brussels, 1 December 2014

I decided to make my first mission as Vice President in this mandate to London not least because I know how important the City is to promoting investment in Europe. I wanted to hear at first hand the views of financial sector practitioners – as well as the needs of industry, represented here by CBI and MEDEF.

Ladies and gentlemen, as you know last week the Commission unveiled our over €300 billion “Investment Plan for Europe” before the European Parliament in Strasbourg.

We received strong backing from MEPs, an overall positive reaction from the markets and we will now be looking to Member States for their political – and financial - support.

The success of the plan will however also be determined by the input of the private sector and that is why the discussion today is so important.

There is no need to convince you of the crucial need for investment in Europe, with much written and much said over the previous weeks and months. We are some 15% below we should be – even allowing for the 'bubble' before the crash.

And yet we all know – and I heard this in London as well - that there is already ample liquidity in the market. Despite this, investment does not materialise.

How do we explain this clear disconnect? Of course, the banking sector is still dealing with the aftermath of the financial crisis and is therefore inevitably constrained.

And at the same time, non-bank finance has yet to take off in many member states. But I believe more fundamentally, it is mainly due to uncertainty, for example on potential growth or regulatory changes. And this uncertainty leads to excessive risk aversion that still persists among many investors.

We want to address this head-on: the Plan that we are putting forward, by providing first loss guarantees, seeks to unlock the existing liquidity in the market and to deliver the investment boost necessary to generate growth and jobs in Europe.

The Plan

Much has been written about this Plan, even before it was published. Not all of it was flattering – much was just wrong. Much of the criticism was based on rumours and we have been accused of wizardry, of creative accounting, you name it.

We know very well that investment is driven by the private sector. The private sector wants – rightly – a return that reflects the risk it is undertaking. We are not asking that the private sector does what the public sector should do. Our aim with the investment plan is to change the dynamics of the risk debate for the private sector and address a market failure.

I have spoken about a triangle for investment : there are three key strands:

  • Mobilising finance – using EU level instruments in a new and smarter way to boost strategic investment through the creation of EFSI that will bring confidence by taking risk out of the equation;
  • Making finance reach the real economy – through a stronger, more transparent pipeline, supported by technical assistance; and
  • Improving the investment environment – by removing non-financial regulatory barriers in our single market.

These three elements work together to provide a comprehensive framework for investment. Our plan does not only provide financing therefore, it also provides information and opportunity.

The financing and liquidity strand

As you will have heard, we will create a Fund, the “European Fund for Strategic investments” (EFSI)at the European Investment Bank. This Fund will operate with a Union guarantee and capital from the EIB.

With the support of this risk bearing capacity, the EIB and the European Investment Fund will be able to sign between €60bn and €70bn Euros in risk-absorbing instruments to projects as well as financial Institutions and investors. These could be equity stakes, guarantees, credit enhancements – as appropriate. We are aiming at the highest possible flexibility.

By mitigating some of the risk, the improved financial structure of these projects will make them more attractive for private sector participants to invest in. We are confident that this will catalyse more than EUR300bn of real investment.

We have worked closely with our colleagues in the European Investment Bank and the European Investment Fund to develop this plan which is based on prudent assumptions. They have a proven track record of success in delivering projects – and have maintained their ‘AAA’ rating.

In addition, the Fund itself will have an investment committee where professionals will take the individual investment decisions free from political interference. They will ensure that projects selected meet all the criteria of a critical market investor and will put their own money at risk to back up their judgment.

Note that parts of the Plan can be activated straight away, namely by boosting the resources of the EIF, the risk capital arm of the EIB.

The projects strand

Liquidity is only one part of the equation. Information is another. Europe can be difficult place to invest. It is easy to get lost in the wide variety of structures and sometimes hard to obtain the information needed for a properly thought-through investment decision.

Transparency of the process, both for general investment opportunities within Europe but also of the work of EFSI, is an important element of our plan. Therefore, we will start a major information initiative on investing in Europe.

Allowing investors access to all information on the key investment projects in the EU will help investors make informed decisions. We believe that there are many viable projects out there and we want to help match up supply and demand for finance.

EFSI may itself invest in projects on this list but that is not guaranteed and we want to make the information much more readily available. Essentially we want to build a true investment hub under the auspices of the European Investment Bank.

This will become a one-stop shop for all stakeholders in the investment process: public authorities that wish to make use of innovative financial instruments: potential investors and potential investees. This way, we will make relevant information and know-how more visible and accessible for those that need to have it.

The investment environment

I come now to perhaps the most important element. It is one thing to use public funds and structures more efficiently and more effectively. But growth does not only require money flowing around more efficiently, it also requires new opportunities for innovative European businesses – many of whom are represented here today.

For this we need further structural reform, at the Union level as much as in Member States. And we are determined to deliver in line with our firm commitment to better regulation in Europe.

There is still a lot of potential in European Integration. Potential that we need to exploit. Further integration of the Single Market needs to take place, especially in energy, digital and service sector industries; and we continue to work on this.

Too many product and service markets in too many European countries remain overburdened with regulation stifling competition and business opportunity.

My fellow Commissioners and I will continue to remind Governments of this basic fact and we aim to push forward an ambitious agenda over the course of this mandate.

Business has a critical role to play and we will need your help and support for this too.

So what is the role for finance?

Let me turn now to the financial sector which is well-represented in this room and which has a critical role to play in promoting long-term growth and investment.

Large banks are currently the dominant actors in European finance, so it is critical that bank finance resumes. With the AQR/Stress Test exercise behind us, we are now seeing some encouraging signs of this happening - including in member states sharply hit by the crisis.

But this is not enough. We need more diversity and integration in financing. In this regard, the Capital Markets Union is key.

Our proposal for a Regulation on European Long-term Investment Funds has now been agreed by Parliament and Council. This will provide an EU regulatory framework and passporting rights for funds specialising in long term investments, for example in infrastructure projects or SMEs. This is positive first step.

We also aim to revive high quality securitisation markets and present criteria for simple, transparent and consistent securitisation, building on successful models elsewhere. The mistakes of the pre-crisis period, where complex securitisation led to a lack of information on the underlying portfolio should not be repeated, but securitisation can offer significant benefits to companies.

Furthermore, we will take our information initiative further in the area of credit information on SMEs information on the planning of infrastructure projects as well as on their credit history. A lack of information on SMEs hinders investment, which we aim to rectify.

But a true capital markets union will need more than that and will likely require action beyond the sphere of finance. But what exactly, in what time frame and under which conditions has yet to be determined.

As you know my colleague Jonathan Hill, with whom I work very closely, will launch a public consultation early next year on capital markets union and the results should help us prioritise future actions.

We very much hope you will all contribute actively to this exercise in the months and years to come

Conclusion

Ladies and gentlemen,

Europe is at a challenging juncture. Jobs are not at the level where we want them to be, growth is not where we want it to be, investment is not where we want it to be.

But the innovation capacity of our economy is strong. The investment opportunities are there. And the financial means that we require do exist.

I believe that our new Investment Plan will make a difference but I have said many times it is not a magic wand. It is the first step on a long journey that we have to take.

It is a plan designed to tackle some of the immediate bottlenecks, and set a direction for the longer term, too.

This plan lays the ground work for a comprehensive partnership between us, the European institutions, the Member States and you, the (European) private sector.

For as Adam Smith famously said: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages

We believe that with this Plan, we have a framework in which everyone can act in their own best interest and yet make a difference for the European economy and the European people.

Ladies and gentlemen, I am looking forward to your questions.

 

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