The new ‘growth package’ from the EU

The sectors to invest in are different fields within infrastructure, such as normal infrastructure, but also transmission of electricity and data. Financing for small and medium-sized businesses is also on the agenda again.

The newly elected president of the European Commission, Jean-Claude Juncker, has just one problem: the EU does not have the 315 billion euros. In reality, Juncker has found 16 billion euros in two EU funds, plus a further 5 billion euros in the commonly guaranteed European Investment Bank (EIB). He will use this sum as a foundation for an investment fund with a balance sheet of 315 billion euros. That’s leverage of 15 times, which is a lot. It seems though as if the European Commission is fully aware of this issue. But the people working for it are smart, so they will just use their bank, the EIB, which is basically guaranteed by EU member states, to create a first level of leverage in the fund.

It’s done this way. The new EFSI becomes an independent unit hosted by the EIB. But the bank actually gets the 21 billion euros paid in and not the EFSI. Backed by this capital, the EIB will participate in the investment fund with 63 billion euros. This amount will act like a sort of paid-in equity that reduces the leverage to five times. In other words, the fund has 20 percent in equity to absorb losses. The leverage of five times still presents an obstacle to attracting investors. But what has been largely discussed so far is the real fiscal, or growth, effect of the investment fund, which is the second challenge for Juncker.

Let’s start with the challenge of finding outside investors for the remaining 80 percent of the fund. This will be a challenge since investing in projects that have not already found financing is difficult because investors are cautious in such cases. As Juncker says, these are high-risk investments.

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