EU €315 billion Investment Plan

The European Commission unveiled on 25 November 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. The proposal, which must be approved by European leaders at a summit in December, would mix an investment fund with a scheme to match new projects with private money.

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.

The 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.

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. 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.