New math? EU unveils plan to turn €21B into €315B in growth-oriented investments

The European Commission, trying to re-start Europe’s struggling economy, announced a plan to apply €21 billion of EU money towards a new financial fund that it claims will stimulate €315 billion in total EU-wide investments from the public and private sector.

The plan is the first major initiative promised by new Commission President Jean-Claude Juncker, who took office on 1 November, to revive the economy. But with a clear signal from European governments that raising new funding from cash-strapped member states was a no-go, the investment plan proposes to move cash away from existing grant programmes, the most common way the EU disburses its budget. Instead, that money will be put it into a special fund administered by the European Investment Bank, to provide high-risk investment for projects that can then attract more private financing.

Whether the strategy will work is unknown – but the immediate impact will be on the existing EU programmes from which the seed capital will come, and may provoke complaints from their supporters. Of the first €8 billion allocated to support the initiative, €2.7 billion will come from the EU’s Horizon 2020 research and innovation programme, €3.3 billion from its Connecting Europe Facility for broadband and transport projects, and the remainder from what it opaquely described as extra funds “in the margins” of its budget.

EU officials briefing journalists were notably short on details about the hurriedly prepared initiative – including any information about which specific parts of those programmes will be affected. An official from the budgets directorate said: “DG Research will decide on which budget lines to divert in the coming weeks. For now, we just have the aggregate figure [of €2.7 billion].”

Maximising the impact

Commission officials argue this isn’t robbing Peter to pay Paul. Rather, it’s applying some of its existing funding towards financial instruments that will, in the long run, have a much greater impact on stimulating innovation and economic growth. The facility, to be called the European Fund for Strategic Investment, will target fast-growing mid-size companies and major projects that, because of their risky nature, would otherwise not get off the ground. The EU money will go to buy equity or subordinated debt – the riskier end of a corporate or project balance sheet. In theory, that will attract private investors to stump up even more money – a leverage effect of as much as 15-fold (which is how the Commission’s math converts a €21 billion investment into a €315 billion benefit).

The strategy has been used in the past – notably, in parts of the US government’s economic stimulus package of 2008. But there, the scale of investment was far higher than the EU is now announcing. And, economists note, the success of such financial manoeuvring depends entirely on the details: How good are the projects? How well are they managed? What are the specific financial terms? None of these details are yet available.

The total Commission commitment will be €16 billion in guarantees for the initiative. A further €5 billion will come from the EIB, the Luxembourg-based EU vehicle for longer-term investment. The EIB is the key player in the plan and will house the fund under special management with a “dedicated investment committee” – a kind of EIB within the EIB.

EU governments will be invited to put their own cash into the fund, meaning the initial figure could rise. Juncker will send his Vice President for Jobs, Growth, Investment and Competitiveness, Jyrki Katainen, on a roadshow to the major financial hubs such as New York, London and Singapore, to persuade institutional investors to shore up the scheme.

On its way to paper, the plan had to steer around an array of political bear traps. Although France wanted more public seed money, policymakers in Berlin insisted that the Juncker plan not involve any more debt-raising, while Britain put up a roadblock against an increase in the EU budget.

Horizon 2020 – a further squeeze?

In the midst of wide uncertainty over next year’s research budget, and how much it will be cut by, researchers will tomorrow be looking for assurances that their funding will not simply be diverted to infrastructure projects.

“If you take money out of Horizon 2020, you have to make sure you reinvest it in research and innovation,” said Kathleen Van Brempt, a Belgian member of the European Parliament (MEP), whose initial reaction was one of disappointment in the less-than-expected seed money offered up by the Commission.  

An EU diplomat said it was mistaken to see the fund as something that had captured research resources. “On the contrary, the proposed contribution of Horizon 2020… will result in additional private funding that will ultimately benefit research and science,” her email read.

A snowball effect, which means that each year the Commission finds itself with far more bills than money to pay them, has left European member states - currently poring over the EU’s budget for next year – already threatening a €1 billion cut in the EU’s research budget.

What projects will the fund bankroll?

Specific projects were not announced alongside the new fund. A task force has screened an initial batch of projects submitted by member states, and will make these publicly available in the next few weeks, according to officials.

Typical investments are expected to include broadband networks, improved transport links, retrofitting buildings to increase energy efficiency, third generation bio-refineries, and expansion and upgrading of research infrastructures.

Available projects, along with their financing options, will be uploaded to a website the Commission will dub “investment advisory hub”.

There will be no geographic limit on projects. On average, EU seed capital will provide 20 per cent of the funding for a given project; private investment will cover the rest, said one EU official.

After Juncker’s announcement, an EU summit of national leaders will have to sign off on the programme next month before the investment vehicle can be turned into EU law by June next year. And the European Parliament will have to vote on legislation to support it, if it is to happen.

In the meantime, the Commission hopes EU finance ministers will be convinced enough to put in money of their own.