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04/12/2016

The Juncker plan: an exercise in federalism and solidarity

Euro & Finance

The Juncker plan: an exercise in federalism and solidarity

The Commission has high hopes for a plan with modest beginnings. [Images Money/Flickr]

The long-awaited European Fund for Strategic Investments was unveiled yesterday (25 November). The EIB, who will be investing 5 billion euros, hopes to wave its magic wand to mobilise 315 billion, without dipping into the Commission budget. EurActiv France reports

The Fund, discreetly constructed by Commission Vice-President Jyrki Katainen over the last three months, offers something to satisfy all tastes.

Using only a small portion of public money, to please the Germans, the Commission expects it to stimulate 315 billion euro of investment in the European Union.

>> Read: Juncker’s €315bn investment plan unveiled: fifteenfold leverage and solidarity for the south

The new fund will aim to stimulate private investment through complex financial arrangements such as subordinated loans and equity financing, similar to the “project bonds” favoured by the United Kingdom.

>> Read: EIB will administer Juncker investment plan through new fund

The total amount available to the Investment Fund could change depending on how much the member states are prepared to contribute. France believes the EU should be even more ambitious in its plan.

>> Read: Hollande’s ambitious ‘New Deal’ for Europe

Contributions excluded from deficit calculations

Member states will be able to give additional funds to the European Fund for Strategic Investments (EFSI), which will be subtracted from their deficit calculations. According to a source in the Commission, Finland, Spain and Slovakia have already expressed an interest in adding extra funds.

Using complicated finance tools, the Commission hopes to multiply the impact of the money invested by a factor of 15. Thanks to the EIB’s triple A credit rating, the funds used will cost very little, which will help in the launch and ultimate success of the projects that benefit from investment. In any case, this is the assumption upon which the Commission has pinned its hopes.

“This is a long term project that will respond to the problem of low levels of investment; we want to give confidence back to investors and remove uncertainties,” said sources from the Commission.

Prepared to take risks

The Strategic Investment Fund will transform the practices of the EIB, which refused to make “risky” investments during the crisis. It is there to be deployed in the higher-risk situations in certain countries and in certain sectors.

>> Read: Spain launches first venture financed by EU ‘project bonds’

“The risks are not the same in Germany and in Portugal, for example. Or from sector to sector. What is certain is that the Fund will not invest in a fiberoptic network in Paris, but rather in the internet in a small village in the Pyrenees,” the Commission said.

Federalism and solidarity with the southern member states

Designing the Fund has been an exercise in both diplomacy and federalism. It will be directed by a joint administrative council of the Commission and the EIB, but there are no plans to put in place a quota for investments in each country. Instead, the investments will be made according to their potential for growth and return.

This will inevitably mean the EU will invest more in the south; an expression of solidarity with the countries that suffered the most in the crisis and were forced to endure drastic austerity measures with dramatic social and economic consequences.

“There is no question of investing in solar power in Munich,” one civil servant warned. 

Background

The new president of the European Commission, Jean-Claude Juncker, has announced a plan to mobilise €300 billion in an effort to kick-start the European economy.

Boosting the Luxembourg-based European Investment Bank's (EIB) capital is the central part of the plan.

The details of the plan were unveiled on 25 November and will be presented to EU heads of states at a European Council meeting in December.

>> Read: Juncker's €315bn investment plan unveiled: fifteenfold leverage and solidarity for the south

Jyrki Katainen, the Commissioner for Jobs, Growth, Investment and Competitiveness, has said that the growth package should include public and private partnerships, increased lending capacity for the EIB and other EU lending bodies, more “future investment” by EU nations in areas such as infrastructure and the completion of the single market.

Timeline

  • 18-19 Dec.: EU heads of states to debate Juncker investment plan at European Council meeting in Brussels