The European Commission proposed a 315 billion-euro ($394 billion) investment plan based on guarantees and a small amount of seed money in order to offer European Investment Bank funds to a wider range of projects.
The EIB will contribute 5 billion euros in start-up cash, accompanied by 16 billion euros in European Union guarantees. The start-up money, projected to have an impact of 15 times its size, will serve as capital for a new EIB unit that can share risk with private investors.
The program, called the European Fund for Strategic Investments, is set to be operational as soon as mid-2015. It doesn’t require EU member nations to commit any new money or alter existing budget agreements. Instead, the commission will dedicate 8 billion euros of existing funds to backstop its guarantee.
“This is the greatest effort in recent EU history to mobilize the EU budget to trigger additional investment, and without changing the rules,” commission President Jean-Claude Juncker told the European Parliament today in Strasbourg, France. “We don’t have a money-printing machine; we will have to attract money and make it work for us.”
By taking on some of the risk of new projects through a first-loss liability, the investment fund aims to lure cash-rich banks and companies off the sidelines. It will support investments in energy, broadband and transport infrastructure and back risk finance for small and medium-sized companies.
The overall effect may be “too little, too late,” Royal Bank of Scotland Group Plc analysts including Albert Gallo wrote in a Nov. 24 note to clients.
“If the EU investment plan turns out to be a levered pea- shooter, though, central bank actions won’t filter through the real economy, and next year’s recovery will be rich in liquidity, but growth poor,” the RBS analysts said in the note.
The European Central Bank has pledged to revive inflation “as fast as possible” and is considering a range of new measures including sovereign-debt purchases. ECB President Mario Draghi also has urged euro-area governments to do what they can to jump-start growth.
EU governments will have the option of contributing to the EFSI. Those that do so would get leeway when the commission, the 28-nation EU’s executive arm, assesses whether their annual spending plans comply with the bloc’s limits on budget deficits, Juncker said.
“If member states chip in capital to the fund, we will not take these contributions into account in our assessment,” he said.
Jyrki Katainen, the commission vice president for competitiveness, said sovereign-wealth funds, hedge funds and other investors would also be able to contribute to the EFSI’s capital base while signaling their interest would be mainly in projects.
“The fund is open,” he told reporters in Strasbourg. Katainen said he didn’t know whether EU governments or investors would take up the option.
Katainen said he plans a “road show” in all EU nations starting with Romania over the next seven to eight months to promote the investment initiative. He also held out the possibility of visiting non-EU countries such as China, Singapore, Qatar and Abu Dhabi.
“We want to explain how the new vehicle will function,” Katainen said. “But also we want to make it visible that there will be a new project pipeline. Feedback that we have gotten from the investors is that they are willing to invest in European infrastructure, but there is not enough mature, well- structured, projects.”
The investment program aims to combine the new fund with a list of eligible projects and regulatory changes designed to improve business conditions. The package will need the approval of EU governments and the European Parliament, although the EIB will be able to start some operations ahead of final approval.
The EIB, the EU’s lending arm, has been under renewed pressure from France, Germany and other nations to expand its operations to take on more risk. The Luxembourg-based lender has said it can’t take on more risk without extra capital because of the discipline required to maintain its AAA credit rating.
The Juncker plan provides the capital for a new and riskier line of lending. EIB officials said this is designed to complement the fund’s top-rated ability to borrow money and shouldn’t be seen as a defensive measure.
The leverage for the new fund is expected to work in two stages: the EIB will be able to make about 63 billion euros in loans, or three times the new fund’s capital; and that lending in turn is expected to attract five euros in private investment for every euro lent. Money for the European Commission guarantees will come from existing resources, including the Connecting Europe and Horizon 2020 facilities.
German Chancellor Angela Merkel signaled general backing for Juncker’s program.
“The federal government supports in principle the package,” Merkel told the German parliament today in Berlin. “We stress that investments are important, but that it has to be clear above all where the projects of the future lie.”