Could China be Europe’s saviour?

Europe’s economic woes have hampered efforts to modernise its infrastructure. But China could in fact prove to be its saviour

China’s Prime Minister Li Keqiang. The country's interest in Europe could see its infrastructure get a much-needed boost
China’s Prime Minister Li Keqiang. The country's interest in Europe could see its infrastructure get a much-needed boost 

Europe’s infrastructure was once the envy of the world. For centuries, it has pioneered the construction of roads, railways, water works and energy provision. It exported many of the greatest engineers throughout the world. However, as is the case with many countries that once laid claim to dazzlingly advanced societies, they have struggled to keep up with the times; in many cases resting on their laurels and failing to invest while other regions built the latest and greatest new pieces of infrastructure.

With Europe’s economy crippled with debt and infrastructure across the region dating back decades, the ability to pay for a much-needed update has proven increasingly tricky for EU policymakers. Confidence in many European economies is at an all time low, with many investors reticent about putting their money into building major infrastructure projects while there remains a danger of default. At the same time, the EU’s labyrinthine regulatory framework means that getting big projects off the ground is even more difficult than elsewhere.

Falling figures
Infrastructure investment within the EU has fallen over the last few years, largely as a result of both the global financial crisis and the debt troubles experienced across the EU. In the eight years since its peak in 2007, infrastructure spending has reportedly fallen by €430bn, according to aviation industry group the Centre for Aviation (CAPA). In 2013, investment was 15 percent below the pre-crisis peak, while some EU member states were spending between 25 percent and 60 percent less than their previous levels.

Not to be outdone by other regions around the world, the EU has announced plans to set up its own infrastructure fund

However, the determination of the EU’s leaders to modernise the region’s infrastructure has resulted in a proposal that could help deliver the sort of investment it desperately needs. Not to be outdone by other regions around the world, the EU has announced plans to set up its own infrastructure fund that it hopes will attract vast swathes of investment from around the world.

Announcing the European Fund for Strategic Investments (EFSI), European Commission (EC) President Jean-Claude Junker set out plans for a fund worth €315bn over the course of the next three years that will help spur private sector investment in European infrastructure projects. Part of the so-called ‘Junker Plan’ to restore growth in the EU, the EFSI will be run by the European Investment Bank (EIB) and will hope to boost jobs and investment in the flagging European economy.

The fund will take a similar form to the newly formed Asian Infrastructure Investment Bank (AIIB), which the Chinese government has established as a rival to both the US dominated World Bank and the International Monetary Fund. By seeking investment from governments around the world, the idea is that global partners will have a stake in the development of Europe’s infrastructure.

Announcing the plan, Junker said the fund was necessary to help Europe’s economy to grow: “We need the plan right now because it is important to say that consolidating public finances is needed. But apart from that policy, we need structural funds to ensure that medium-term development of the European economy can rise.” EC Vice-President Werner Hoyer added, “We are having a paradigm change in the use of the EU budget because the EU shifts resources from grants to guarantees, from subsidies to loans and this is a great step.”

Leading development in infrastructure
China’s interest in Europe’s infrastructure comes at a time when its own AIIB has helped to spur development across Asia. The country is now set to play a leading role in the development of Europe’s infrastructure. In July it was reported that China’s Prime Minister, Li Keqiang, would pledge around €10bn to the fund at first, with potentially more coming if opportunities arose.

On a visit to Europe in June, Li Keqiang said that existing levels of trade flows between the EU and China had been not been “satisfactory”, and called for a treaty to be brought forward between the two regions. Such a treaty would help to make it easier for Chinese companies to buy into European industry. Speaking to the FT, Li Keqiang said, “The scale of two-way investment, a mere $20bn or less in 2014, is hardly satisfactory given the big size of the Chinese and EU economies and the huge volume of two-way trade. If a comprehensive, balanced and highly standard investment treaty could be reached early, it will bring opportunity for both sides to combine their respective strengths and form a new pattern of co-operation.”

Shortly after Li Keqiang’s trip to Europe, US think tank the Brookings Institution published a report explaining why China was looking towards Europe for investment opportunities. The authors of the report, Jonathan D Pollack and Philippe Le Corre, wrote that part of the reason for China’s interest in Europe was to remind other countries, and in particular the US, that it had other potential partners in global trade.

However, one of the primary reasons for China’s interest was the EFSI, which would complement its own infrastructure plans, namely the creation of a new ‘silk route’ that would restore China’s historically strong trading position. “China sees complementarity in its own grand infrastructure plan [‘One Belt, One Road’] to tie the future development of Central, South and Southeast Asia to increased Chinese trade and investment with Europe.”

They add that it makes sense for Europe’s individual member states to negotiate with China as a group, rather than alone, if they are to secure the best development for the entire region’s infrastructure.

“European leaders understand that dealing individually with a stronger China weakens the EU’s hand. By linking its new ‘silk road’ to Europe’s own plans for infrastructural development, China seeks to play an enhanced role in the global economy and increase its stake in the EU.”

Targeted projects
Many of the projects targeted by the EFSI will focus on infrastructure, education, research and development, and various forms of clean energy. Each of the projects that the scheme will target will receive 20 percent of funding from the fund. There will also be considerable investment in transport infrastructure, with roads and rail networks receiving funding for much needed upgrades. Europe’s many shipping ports are also likely to be clamouring for investment from the fund to ensure they can cope with the increasing demands of global trade.

A number of projects have already been given the green light by the EIB, which will now use the funds from the newly formed EFSI to realise them. These include a number of offshore wind, biomass and transmission energy projects in Denmark, various renewable energy projects and water treatment schemes in Spain, energy efficiency investments in French residential buildings, and the construction and refurbishment of three hospitals in Austria.

There is also going to be a concerted push to deliver high-speed and extensive broadband throughout member states, so that the EU is not left behind by the technological advancements being seen by the internet.

Europe’s digital infrastructure is seen as a vital cog in the future of the EU’s economy, and so a large part of investment will be targeted at expanding things like 4G networks, developing 5G networks, and building fibre optic broadband.

With the EFSI fully operational before the end of 2015, European leaders hope that a wave of investment will soon help get a number of infrastructure projects off the drawing board and built, creating thousands of jobs in the process. However, for the likes of China, the opportunity to buy into lucrative new industries across Europe, and connecting them to their own grand infrastructure schemes could be one not to be missed.