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.