EU investment plan; game changer or empty vessel?

November 26, 2014

European Central Bank President Draghi and Eurogroup President -Juncker talk during a news conference in Nicosia, Cyprus

New European Commission President Jean-Claude Juncker will unveil his investment plan for the bloc to the European Parliament today which aims to generate 315 billion euros of investment and lift growth onto a higher plane. The details were put out last night and there’s no new money in it. Instead, 21 billion euros of funding is expected to leverage private investment of a whopping 15 times that amount.

Five billion euros will come from the European Investment Bank, the EU’s investment vehicle, with the other 16 billion euros coming only in the form of a guarantee from the European Union. Critics will say it looks flimsy to say the least. The programme could be operational by mid-2015 and will act as a “risk buffer”, absorbing losses on infrastructure projects before other creditors are hit in the hope of luring private investors seeing a lower level of risk.

The Commission hopes it will lift growth by 1 percentage point over three years. The bigger win may be if it alleviates the pall of gloom hanging over the euro zone. But can it with companies so reluctant to invest in this depressed environment?

With Germany bent on balancing its budget next year for the first time since 1969 there is little sign of the fiscal boost that European Central Bank Mario Draghi has decided is necessary to get the economy going.

Draghi cleared the path to full quantitative easing last week by declaring that “excessively low” inflation had to be raised fast and that the ECB would act more forcefully if its existing efforts to pump money into the listing euro zone economy fall short.

Without governments rowing in alongside, on the fiscal front and more importantly with a greater urgency behind structural economic reforms, he will find it harder to build a convincing majority on the ECB Governing Council for QE.

Germany’s Angela Merkel speaks in the Bundestag on the second day of a week-long debate on the 2015 budget. She is likely to focus on economic and financial issues, possibly touching on Juncker’s investment programme.

Russian Finance Minister Anton Siluanov and Central Bank Governor Elvira Nabiullina will address the upper house of parliament on the budget and state of financial markets.

Siluanov said on Monday that Russia is suffering losses at a rate of about $40 billion per year because of Western sanctions and $90-100 billion from the drop in the oil price. Having burned through reserves trying to defend the rouble, the central bank has switched tack and recently whacked up interest rates.

One of the surprises of this saga so far is the central bank’s apparent ability to operate independently. In doing so it has just about hung on to its inflation-fighting credentials and desire to see the rouble float properly, goals which may well hasten recession in the near-term. If there’s one thing we know about Vladimir Putin it is that he must have allowed this to be the case and can swivel on a dime. On Tuesday, he called for “teamwork between the central bank and the government”.

Russia’s economic wellbeing is inextricably linked to the price of oil. OPEC meets from tomorrow with no one quite sure whether it will cut output to try and stop a 30-percent-plus fall in crude prices since June. Impromptu talks between Saudi Arabia, Venezuela, Russia and Mexico ended on Tuesday without any plan to cut output despite a collapse in prices.

Russia’s top bank Sberbank, which was placed under Western sanctions under the last round, has just reported a 24 percent fall in Q3 profits year-on-year.

Top U.S. military commander General Philip Breedlove visits Ukraine today for talks with senior political and military leaders. Breedlove, who is head of U.S. European Command as well as NATO’s top military commander, will be visiting Kiev in his U.S. capacity.

Nigeria is in the same boat as Russia on the oil front. It’s worth watching its naira currency today after the central bank devalued the naira by 8 percent and raised interest rates sharply on Tuesday, as it sought to stem losses to its foreign reserves from defending the currency.

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