How the EU Plans to Turn $26 Billion Into $390 Billion

The European Union is planning a 21 billion-euro ($26 billion) fund to share the risks of new projects with private investors, two EU officials said.

The new entity is designed to have an impact of about 15 times its size, making it the anchor of the EU’s 300 billion-euro investment program, according to the officials, who asked not to be named because the plans aren’t final. European Commission President Jean-Claude Juncker is due to announce the three-year initiative this week.

The commission will pledge as much as 16 billion euros in guarantees for the vehicle, which will also include 5 billion euros from the European Investment Bank, the officials said. Loans, lending guarantees and stakes in equity and debt will be part of its toolbox, with the goal to jumpstart private risk-taking so that stalled projects can get off the ground.

Juncker’s investment plan aims to combine EU resources and regulatory changes “to crowd in more private investment in order to make real investments a reality,” EU Vice President Jyrki Katainen said on Nov. 14 in Bratislava. The plan is one element of the EU’s economic strategy and “not a magic wand with which we will be able to miraculously invest ourselves out of a difficult economic climate,” he said.

Europe is struggling to spur economic growth as it emerges only slowly from waves of crisis. The 18-nation euro area is forecast to see growth of just 0.8 percent this year, according to EU forecasts, while the region’s unemployment rate of 11.5 percent masks rates of about 25 percent in Greece and in Spain.

‘What We Must’

The euro is on course for a fifth monthly decline after European Central Bank President Mario Draghi said last week that ECB officials “will do what we must” to spur inflation. The single currency was little changed at $1.2404 against the U.S. dollar at 7:38 a.m. in London after declining 1.2 percent on Nov. 21.

While the Juncker proposal involves seeding investment in infrastructure and other fields, the 21 billion-euro sum with a proposed leverage rate of 15 times risks disappointing markets.

Even with additional funds of 30 billion euros and a more modest leverage rate of 10 times, “the plan may not be credible as a start,” Royal Bank of Scotland Plc analysts including Alberto Gallo said Nov. 18. All the same, if the European Central Bank became involved in joint action with the EIB, “it could be a game changer for Europe,” they said.

Broad Range

The fund is designed to make use of existing resources and not require any new cash infusions from member nations, the EU officials said. The EIB will house the fund, which will have its own management and be able take on a broad range of roles. It will be able to operate with fewer restrictions than earlier initiatives, like a project-bond program that is only available to cross-border ventures.

The EU is preparing a list of projects alongside that could take shape quickly. Because the fund will be able to bear some of the risk of starting projects, it may offer a way around national budget constraints and private-sector reluctance to take on new risk, according to the officials.

“We need a step change in efforts to tackle the obstacles hampering private investment and to optimize the use of public investment in Europe,” Emma Marcegaglia, president of the BusinessEurope federation of employer groups, said on Nov. 21. The group released a report on investment in Europe calling for the EU to lower national barriers, improve regulation and lower the costs of doing business inside the 28-nation bloc.