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Analysis: Austerity threatens EU's competitive edge in infrastructure

An Iberia passenger plane taxis on the tarmac of Madrid's Barajas airport February 28, 2013. REUTERS/Sergio Perez
An Iberia passenger plane taxis on the tarmac of Madrid's Barajas airport February 28, 2013. REUTERS/Sergio Perez

By Anthony Deutsch

BERLIN (Reuters) - Europe's carefully maintained autobahns, high-speed TGV trains and vast network of modern airports have long been the envy of the world.

But thanks to austerity budgets that are slashing infrastructure spending just as other parts of the world are ramping it up, that may not be true for much longer.

European infrastructure spending rose just 1.5 percent last year to $741 billion, compared to global growth of 4.5 percent and a 7.1 percent rise in the Asia-Pacific, according to data compiled by Marketline, a business information provider.

Spending in Europe will increase slightly over the next four years, to 4.3 percent growth by 2016, Marketline told Reuters, but will continue to significantly underperform the world average. Only the United States will do worse, with growth of just 1.8 percent seen in 2016.

Company executives, trade groups and even European Union officials themselves say the region is in danger of falling behind competitors, with possibly irreversible consequences.

"We are out of pace with other parts of the world. We are not rejoicing," said Harold Ruijters, who leads the Transport Commission's Trans European Network unit, which aims to connect Europe's fragmented railways, roads and airports.

Brussels' main infrastructure funding budget, the Connecting Europe Facility, was cut in the latest EU budget announced in February from an originally allocated 50 billion euros to 29.3 billion euros over the next seven years.

Broadband and digital infrastructure took the biggest hit, cut from 9.2 billion to just 1 billion euros.

The budget for spending on major transportation through 2020 was cut by 38 percent from 21 billion to 13 billion euros, forcing the Transport Commission to drop air and road projects, which will instead need to seek uncertain sources of commercial funding.

"We are dealing with a severely reduced budget. At the same time, during a time of crisis we are acknowledging that this was perhaps the best deal we could get," Ruijters told Reuters.

Several years of earlier austerity cuts in infrastructure have already started hurting Europe's competitive position, he said, citing railways and aviation as problem sectors.

Reduced budgets and the prospect of long-term weak economic growth in the bloc will make it virtually impossible to meet spending needs in the coming two decades, he said.

The financial reality is out of sync with the EU's long-term strategic goal of creating jobs, and increasing competitiveness and growth in a single European market, which the EU Commission had estimated would require 1.5 trillion euros of spending on transportation infrastructure by 2030.

"At the moment we have one of the best infrastructures in the world, but it is ageing and we have to invest billions just to keep it up. We are far away from completing the internal market, in all transportation modes," said Jurgen Thumann, head of Business Europe, a Brussels-based industrial lobby group.

"As other world regions are launching ambitious transport modernization and infrastructure investment programs, it is crucial that European transport continues to develop and invest to maintain its competitive position," Thumann told Reuters.

Currently 12 of the top 20 nations in a ranking by the World Economic Forum for 2012-2013 are in Europe.

But this year China will for the first time spend more on infrastructure than Europe, though per capita it is still a small fraction of what is spent in the United States and in Japan, Marketline said.

Pedro Rodrigues de Almeida, director of infrastructure studies at the World Economic Forum, concurred that even after the European economy recovers, which economists expect could happen as early as the second half of this year, essential spending will lag requirements for years to come.

"We will not recover the levels of construction expenditure that we had in 2007-2008, or just before the crisis, until around 2016. This is something that is going to take several years," he said.

WHERE'S THE MONEY

A decades-long trend of falling global public expenditure on infrastructure, from around 9.5 percent of gross domestic product in 1990 to 7 percent in 2005, has been driven by rising costs for pensions and health care, according to the Organisation for Economic Cooperation and Development.

Until the global financial crisis hit, the private sector had increasingly filled that gap.

Now, while there are plenty of investors such as pension funds or insurance companies who have money available, they are restricted in how that money can be invested to avoid too much risk and meet targets, meaning only a small percentage of their total funds may be allocated for infrastructure projects which often require billions over many years, if not decades.

The same applies for banks, which face tougher regulations over lending money.

The number of infrastructure projects to be financed fell eight percent last year, the first decline in a decade, the OECD said. Lending to European projects, including total debt and equity, slowed by nearly 39 percent to slightly more than $49 billion.

"The cost of Europe's infrastructure needs are so great they go beyond what is imaginable," an infrastructure investor who asked not to be named told Reuters.

"This will hurt Europe in the long run. It is inevitable."

STRUCTURAL UNDER-INVESTMENT

In Germany, which makes up 15 percent of total European infrastructure spending, 41.5 billion euros worth of projects will be started, continued or finished between 2011 and 2015, down from an initially budgeted 57 billion euros.

A spokesman for the German Ministry of Transport told Reuters the situation was one of "structural under-investment."

"There are so many projects waiting to be carried out, but there's no money there. We have succeeded in getting some more funding, but more is needed. We need it because this investment is important for jobs, the economy and prosperity of Germany."

A high-profile plan that may be dropped is the four-billion-euro French canal originally cited as one of 30 priority infrastructure projects backed by Brussels, which Paris has said it can now only afford if 30 percent is paid out of European funds.

The Seine-Nord canal is a 106-km, high-capacity waterway that will link Seine river to Belgium, Germany and the Netherlands. It would relieve Europe's most congested transport corridor with more than 130 million tons of traffic per year.

Construction which was supposed to start next year was expected to create 4,500 jobs, with around 25,000 new permanent jobs between 2025 and 2030. Its future is highly uncertain as the French government reviews 245 billion euros worth of costly projects.

A Transport Ministry spokeswoman said two working groups were evaluating technical aspects, costs and financing options, with an outcome expected in April.

In Ireland, the transport budget for the period 2010-15 was reduced by almost 50 percent in just two years from 17.5 billion to eight billion euros.

Plans to give Dublin its first underground rail services - one to connect the airport to the city centre and another to link two existing rail lines - have been scrapped. The projects would have cost 2 billion euros, the government estimated.

Italy's parliament in December froze a 3.9-billion euro contract to build a road and rail bridge connecting Sicily to Italy's mainland, known as Ponte sullo Stretto di Messina.

Spain is budgeting 9.6 billion euros in public infrastructures in 2013, down 16 percent from a year earlier and down 36 percent from 2008, when 15 billion were targeted. Several major toll-road projects were pulled after going bankrupt due to over-spending.

That led to the halt of the construction of 14 luxury stations along the high-speed rail network, saving 3.5 billion euros, and the cancellation of a railway from Madrid to Lisbon.

TRANSPORT NETWORK

Trade within Europe, which has a population of more than 730 million and represents roughly 22 percent of the world's cargo by value, is expected to double in the coming decade.

Brussels said in a policy paper released before the recent budget cuts that 550 billion euros in high-priority projects were needed through 2020 to create a core transportation network to meet the increased demand.

The investment would connect 120 major ports and airports to rail, upgrade 15,000 km (9,300 miles) of rail tracks to high speed and remove 35 key cross-border bottlenecks. The region's railways use seven different gauges and only 20 major airports and 35 major ports are directly connected to the rail network.

The upgrades would not only make the distribution of goods faster and cheaper, but also be required to meet EU targets to reduce carbon emissions by 60 percent, halve conventional car use and shift 50 percent of long distance freight onto trains and ships by 2050.

Airline executives have been among the most outspoken about concerns that Europe risks losing its competitive position if it fails to implement these plans.

Paris' Charles de Gaulle Airport plans to spend 2.1 billion euros between 2011 and 2015 on new facilities, for example, while Dubai said last year it plans to invest six billion euros in airport expansion by 2018 to boost capacity by 50 percent.

"Europe was a leader in terms of quality infrastructure," Air France-KLM chief executive Jean-Cyril Spinetta told Reuters. "I am very concerned about the future, especially airports. The amount of investment in other regions is incredibly high."

(Additional reporting by Victoria Brian in Berlin, Elena Berton and Gilles Guillaume in Paris, Conor Humphries in Dublin, Danilo Masoni in Milan and Jose Elias Rodriguez in Madrid; Editing by Sonya Hepinstall)

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