EU's growth pact to revive economy may fall short

Fri Jun 29, 2012 9:38am EDT

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* Pact is part of a growth plan to revive economy

* Only half of 120 bln eur package to hand quickly

* France hopes deal can be counterweight to austerity

* Focus is on infrastructure projects, investment

* Unlocking funds may prove problematic

By Robin Emmott

BRUSSELS, June 29 (Reuters) - EU leaders signed a growth and jobs pact on Friday that aims to pump 120 billion euros into the region's stalled economy, but only about half of that money can be counted on quickly and officials have doubts about how effective the plan will be.

Conceived as way to counterbalance Germany's focus on tight budgets, the French-backed pact aims to free up money to invest in infrastructure and jobs at a time when one in 10 euro zone workers are unemployed and the economy is on the brink of recession.

The pact was almost derailed at the eleventh hour, with Italy and Spain threatening to withdraw their support unless Germany agreed to action to bring down their spiralling borrowing costs - an undertaking that Berlin signed up to overnight.

"The key short-term challenge across Europe is to revive growth," European Council President Herman Van Rompuy told a news conference on the second day of the summit in Brussels.

The pact "will mobilise 120 billion euros for immediate investment, which will boost the financing of the economy and help create jobs."

But the only concrete step that leaders agreed was to increase the capital of the European Investment Bank's by 10 billion euros, boosting its lending capacity by 60 billion.

Relying on 55 billion euros in unused aid for EU regions takes the plan's envisaged funds up to 115 billion euros, but overlooks a dispute about whether the money is really available.

A 4.5 billion euro top-up will come from project bonds backed by the EU. Reaching that level of investment could prove difficult if co-investors cannot be found and the EU is only putting forward 230 million euros in collateral.

"Everyone is happy when you can constitute stimulus packages," Swedish Prime Minister Fredrik Reinfeldt told reporters at the summit. "But at the end of the day, without reforming the economies... bringing order in public finances, bringing down the debts, I think we won't get space for the kinds of investments we all need."

Leaders believe that increasing the EIB's lending capacity by 60 billion euros would unlock up to 180 billion euros in additional investment across the EU.

But it is unclear at a time of economic stagnation and given the bank's stringent lending criteria how many projects the EIB will find to invest in.

Even if high-profile projects can quickly be identified for investment - with the intention to focus on the energy, transport and telecoms sectors - no one knows how much of a boost it will give to growth in the near term.

UNLOCKING THE FUNDS

France's new president Francois Hollande called for the growth pact in his inaugural address in Paris in May, declaring that Europe needed "projects, solidarity and growth".

He repeated that call at the summit, saying the pact would be worth 1 percent of Europe's economic output.

But even Ireland, widely praised for sticking to the reforms mandated under its bailout programme, says it probably cannot rely on the EIB because the credit rating of the country and its banks do not meet the EIB's lending criteria.

"The growth pact is frankly second order relative to sorting out the crisis," said Malcolm Barr, a senior economist at JP Morgan in London, who said the pact's role was mainly symbolic.

"It is about putting something on the table that gives a sense that the region is not indifferent to growth in the near term, and it is about meeting demands from politicians who want something symbolic in that space," he said.

The euro zone has narrowly avoided a recession so far this year but there is a growing divide between the Mediterranean's stagnant economies and the resilience shown further to the north. Outside the euro zone, Britain is also in recession.

Leaders are looking to make use of the aid that has not yet been allocated to specific projects for the 2007-2013 period, but the money is not sitting in a bank account in Brussels and it is still up to individual EU countries to release it.

"It would be wrong to say this money is freely available," Commissioner Johannes Hahn - the European commissioner who oversees the EU's development budget - told Austrian radio this week.

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