WEEKLY COMMENT 27-11-2014
By Barry Edwards
The EU Investment Plan for Europe
Jean-Claude Juncker, the President of the European Commission, has announced the details of an investment plan to boost the economy of the EU. It is intended mainly to help the southern countries that have struggled to achieve any growth over the last five years but will support all qualifying projects wherever they are based in the EU. If you would like to read the complete document explaining how the plan will work and where the funds will come from, click on the link below, it is 20 pages long;
The plan is very well written and takes full advantage of some of the techniques that have been discussed in this weekly comment. The funding is being targeted at infrastructure projects, €240 billion, and SME’s, €75 billion making a total of €315 billion investment over three years. The plan is also coordinating all the other support plans that are available throughout the EU for projects and SME’s which over the next six years will add another €450 billion and more if the individual nations provide further co-financing support.
I have selected below some extracts which explain what the EU Commission is attempting although I would advise reading the whole document if you are involved with the funding objectives because it does encourage participation by those people and companies that can contribute.
‘Europe urgently needs an Investment Plan. As a consequence of the economic and financial crisis, the level of investment in the EU has dropped significantly since its peak in 2007, by about 15%. This level is also well below its historical trend. Only a partial rebound is projected over the coming years. Economic recovery, job creation, long-term growth and competitiveness are being hampered as a result.
There is no simple or single answer. General uncertainty about the economic situation, high levels of public and private debt in parts of the EU economy and their impact on credit risk limit our room for manoeuvre. However, at the same time, there are significant levels of savings and – in contrast to some years ago – high levels of financial liquidity that can be mobilised. Moreover, Europe has plenty of investment needs and economically viable projects in search of funding. The challenge is to put savings and financial liquidity to productive use in order to support sustainable jobs and growth in Europe.’
‘In addition, the European Fund for Strategic Investments will support risk finance for SMEs and mid-cap companies across Europe, relying on the European Investment Fund (EIF, part of the EIB-Group) for the operational implementation. This should help them overcome capital shortages by providing higher amounts of direct equity, as well as additional guarantees for high-quality securitisation of SME loans. This is an effective way to kick-start job creation and growth, including the recruitment of young people.’
‘From 2014 to 2020, EUR 450 bn (EUR 630 bn including national co-financing) will become available for investment as part of the European Structural and Investment Funds. It is essential that Member States and regional authorities get the maximum impact from EU funds by focusing on key areas and capitalising on every euro invested.’
The plan has been devised to utilise a small sum of money from the EU budget and other allocated resources, €15 billion and €6 billion from the European Investment Bank (EIB) making €21 billion altogether. The EIB will then issue €60 billion of bonds to provide some equity for the projects and SME funding which is then geared up to provide the €315 billion of investment. The European Fund for Strategic Investments (EFSI) will issue guarantees for the loan portion of the funding and project manage all investments. The EFSI will be controlled by the EIB which has a long history of managing infrastructure projects.
The EIB is rated AAA which it protects avidly and since there are many bond funds in Europe that can only buy AAA bonds, it will have no difficulty placing them in the market. If you would like to know more about how the EFSI would work there is a reference to something similar in the second half of ‘Suggestions for the Resolution of EU Bank Recapitalisation’ which you can click on in the right hand column of this page.
The whole concept of this investment plan is to bring together all the funding facilities in the EU within one organisation and utilise the vast sums of cash that are not earning a decent return. It provides banks with a secure risk free lending opportunity allowing them to utilise their deposits in the real economy which has been starved of the resources to grow. Projects have always been difficult to finance without a large equity stake or guarantees from acceptable companies or government sponsored organisations. This technique removes many of the hurdles to this kind of investment and stimulates economic activity right down the SME sector that supplies much of the equipment and labour for these projects.
In my view the EU Commission has finally made the right moves to have a real impact on the economy of the union without having to raise sovereign debt to finance the investment. This whole approach will really make a difference and let’s hope the good intentions outlined in the plan are activated and implemented as quickly as possible by all the member nations that are a key part to make this happen. Congatulations to Jean-Claude Juncker and his team for making the effort to put together this plan and attempt to grow the EU economy in a very innovative and creative way.
That’s all for this week, more observations next week.