Juncker’s €315bn investment plan unveiled: fifteenfold leverage and solidarity for the south
9 December 2014, EurActiv
The European Commission yesterday (25 November) unveiled the mechanism for its much-heralded €315 billion investment plan, revealing how a limited €21 billion of initial public money is intended to lift fifteen times as much in capital.
Details on the new fund reveal that the cash will be funnelled towards Europe’s crisis-ravaged south, away from the wealthier north in an effort to boost solidarity.
After years of firefighting to save the euro zone from collapsing under the weight of accumulated debt, Europe needs an ambitious investmnent plan, said Jean-Claude Juncker, the President of the European Commission.
“We need to send a message to the people of Europe and to the rest of the world: Europe is back in business,” Juncker told the European Parliament today (26 November).
Assembled over the summer by the team of Commission vice-president Jyrki Katainen, the idea is to create a new European Fund for Strategic Investments (EFSI), with €5 billion coming from the European Investment Bank and an €8 billion guarantee from existing EU funds designed to secure a contribution of €16 billion in total from the institutions.
The €8 billion guarantee will come over a three-year period from the Connecting Europe Facility (€3.3 billion); Europe’s research programme Horizon 2020 (€2.7 billion) and so-called “budget margin”, or unused funds, worth €2 billion.
The resulting EFSI fund totaling €21 billion is expected to generate €240 billion for long-term investments and €75 billion for SMEs and mid-cap firms over the period 2015-2017.
One euro goes in, 15 come out
This fifteenfold multiplication from the initial investment to the final amount is to be achieved through a series of leverage methods, according to the EU executive.
The EFSI funds will serve as credit protection for a range of new activities to be carried through by the European Investment Bank (EIB).
These include long-term debt financing for higher-risk projects, subordinated loans and a variety of equity financing. These longer-term financing instruments will be targeted at a range of sectors including transport, energy and the digital economy.
Meanwhile, EFSI funding will also go to the European Investment Fund (EIF), which in turn will provide credit protection for a range of new activities designed to benefit SMEs.
These include new venture capital injections, loan guarantees, securitisations and seed financing designed to offer micro-loans to SMEs, to fund start-ups or offer mid-cap companies venture capital.
The €21 billion investment will generate a threefold increase in the instruments available for the EIB and EIF to pass on as investments, and these loans will in turn “allow other investors to join in and produce a further fivefold multiplying effect,” according to explanatory documentation produced by the Commission, accounting for the total fifteenfold multiplier.
Member states free to contribute more
Meanwhile, the EU executive believes that more financing can be provided by individual member states to build on the basic investment plan. Eurozone countries will be offered the opportunity to invest further top-up amounts into the fund, to be spent in their countries, which will then be discounted from the calculations of their deficits within the European Semester.
A Commission source told EurActiv that Slovakia, Finland and Spain had already expressed interest in so doing.
“This is a long-term investment plan designed to respond to the lack of investment that Europe is currently experiencing,” the source said. “We want to reinvigorate confidence in investors and alleviate their doubts,” he added.
In general, the new tools are designed to allow the EIB and EIF to make riskier investments.
The method of distribution of the funds will be decided by an administrative council jointly controlled by the EIB and the Commission, though no quotas are foreseen in respect of member states.
However, since the funds are intended to act as levers for growth, there will be a bias towards those regions – particularly the southern Mediterranean countries – which have suffered most as a result of the financial crisis.
“There is no question of this money heading towards solar panel projects in Munich,” an official told EurActiv.
At a press briefing held earlier in the day BusinessEurope – the association representing European business – director-general Markus Beyrer said that Europe needed to take an optimistic attitude towards the proposal.
“If this was proposed in the US by President Obama, there would be momentum behind it, but too often we in Europe suffer from a glass-half-full outlook,” Beyrer said, adding that he hoped that the fifteenfold multiplier in the calculations could be achieved.
However, the business chief said that a host of regulatory barriers to growth needed to be tweaked or removed in order for the plan to work.
Reforming the emissions trading system, improving carbon leakage protection, withdrawing the financial transaction tax proposals and implementing an optional plan for the establishment of a common consolidated corporate tax base were all amongst BusinessEurope’s proposals.
“We need a step change in the efforts to tackle the obstacles hampering private investment in Europe,” he said.
“It’s in everyone’s interest to see stronger economic growth in Europe so I welcome the focus in today’s proposals on reforms to raise growth prospects across Europe and the emphasis on increasing private sector investment,” said UK Chancellor of the Exchequer, George Osborne.
“In particular, specific steps on structural reforms to complete the single market and improve the incentives for investment are essential for Europe’s competitiveness and prosperity, and are a longstanding priority for Britain,” said Osborne.
In the run up to today’s announcement, President Juncker’s growth plan has attracted widespread scepticism from analysts who doubt it can address Europe’s post-crisis investment woes. CEE Bankwatch Network, an NGO which monitors the activities of international financial institutions, said: “Big investment talk based on a leverage ratio of 15 to 1 is optimistic to say the least, if not irresponsible.”
“In order to attract private investors the fund will only be used to ‘de-risk’ investments in risky projects that face difficulties attracting capital,” Bankwatch noted. But “de-risking does not mean risk disappears, but rather that risk is passed on to public institutions and EU taxpayers,” it warned.
“What looks at first sight like a big, new silver bullet to finance large infrastructure projects could very easily end up having a devastating effect on Member State budgets and the economy if the projects fail,” said Xavier Sol, director of Counter Balance, a European coalition of development and environmental NGOs. “Instead of blindly cheering a new source of cheap money we should be a bit more careful in assessing the solidity of this scheme and the clear risks that accompany it.”
Manfred Weber MEP, Chairman of the EPP Group in the European Parliament said: “We have made the promise that the citizens of Europe will be central to everything we do here. This is what the investment plan is about: boosting growth, creating jobs, adapting our economies to the challenges of the 21st century. The EPP Group strongly supports the European Commission’s investment plan presented today.”
Gianni Pittella the president of the Socialists and Democrats Group stated:
“The paradigm has finally changed. From the blind austerity dogma of the Barroso era, we are now moving to a new phase focused on investment, jobs and growth. This is just the beginning of this necessary process but we are at a turning point. Member states contributions to the new investment fund will now be deducted from the calculations of their deficits and national debts. We broke the taboo of rigidity. It is not about breaking the rules, but rather about the need for member states to count on flexible rules being applied in an intelligent way. This is the clear outcome of our political battle. The S&D Group fought hard for that and we can now be proud of this achievement.”
Commenting on the European investment plan presented in the European Parliament today by European Commission president Juncker, Greens/EFA co-president Philippe Lamberts stated:
“There is thankfully widespread agreement that the European economy needs a shot in the arm but the investment plan proposed by president Juncker lacks ambition, means and clear goals. In terms of ambition, the headline €315 billion sum is clearly wishful thinking. The plan relies on wildly unrealistic projections on the ability to leverage private investment; it is hampered by the low level of public investment and the doubts as regards whether many of the funds are fresh or merely recycled existing commitments. Reallocating €21 billion of already committed funds will not mobilise €315 billion: a leverage effect of 15 is not serious.”
The ALDE Group welcomes the Investment proposal by the Commission. ALDE President Guy Verhofstadt said: “First, we do not need public money, we need a serious guarantee scheme behind the fund. Not only the European budget and the EIB should be participating in this but also the European member states must be on board. This will ensure a credible guarantee scheme that turns around 100 billion and ensures a funding of investments of around 600 /700 billion.”
“Secondly, we need to secure an interesting return on investment. The best solution for this is a tax exemption on the interest that this fund creates. This will attract not only institutional investors but also ordinary Europeans.”
The League of European Research Universities (LERU) regrets “that money from Horizon 2020, the EU’s successful research and innovation programme, will be diverted to the European Fund for Strategic Investment (within the European Investment Bank), for a vague and highly uncertain project. In the midst of 2014/2015 EU budget discussions between the EU institutions, which are already very threatening for Horizon 2020 and its awarded budget, this is a new subversion of the most important EU funding source for research and innovation. It should be clear for the EU institutions and the member states that Horizon 2020 is not a lemon which can be squeezed according to the flavour of the day! ”
Social Platform warns that the European Social Model will not survive unless a serious commitment is made to invest in ambitious and integrated social policies.
“We are still missing investment in social policies within the package that go beyond job creation and job access. Social investment is vital for both social and economic prosperity, and for achieving growth that is not only smart, but also inclusive.”
Bernadette Ségol, General Secretary of the European Trade Union Confederation (ETUC) said: “I salute any attempt to increase investment which would bring jobs, but I do not believe Mr Juncker can raise €315bn from €21bn. The European Commission seems to be relying on a financial miracle like the loaves and fishes. Raising €315bn would be quite a feat, but would fill less than 40% of the annual investment shortfall since the crisis. I am not holding my breath for a major impact on growth or unemployment. A lot more will be needed to get Europe’s economy moving. I urge European Governments to boost the investment effort.”