The Juncker plan and the multiplier effect
On 25 November, the European Commission unveiled the mechanism for its plan to support investment projects totaling at least €315bn over the next three years. Marie-Hélène Duprat explains (Senior Advisor to the Group Chief Economist).
On the surface, it's an ambitious plan to address the drastic lack of investment in EU countries—a 15% drop in investment since the global financial crisis. The idea of the Juncker plan is that €21 billion of public money will be leveraged to attract private investment worth 15 times the original amount. The Commission hopes that the guarantees and seed money will encourage private finance to enter strategic investments in a range of infrastructure projects across the EU, from transport to energy to internet broadband.
The Juncker plan provides for the creation of a new European Fund for Strategic Investments (EFSI), which will rely on €16bn of funding in the form of guarantees drawn from the EU's budget (of which, €8bn will come from existing unused EU funds) and €5bn of equity funding from the European Investment Bank (EIB). The resulting EFSI totaling €21bn is set to be operational in June 2015. Individual member states will be able to provide additional capital to the Fund and their contribution will not be taken into account for the Stability and Growth Pact assessment. The plan also provides for the establishment of "a project pipeline" of proposals for investors, backed by a technical assistance programme to channel investments where they are most needed.
The EFSI will serve as credit protection for new potentially risky projects. These guarantees will allow the EIB to provide €63bn worth of financing (multiplier of 1:3) in the form of subordinated debt. This safety buffer is then expected to catalyze private investment in the senior tranches of the same projects, with a multiplier effect of 1:5. Under this mechanism, the Fund could thus eventually yield €315bn of additional finance (multiplier of 1:15), of which €240bn would be directed to strategic investments and €75bn to SMEs and midcap companies.
The €315bn plan would amount to 2.4% of the EU's GDP over the next three years which, even if it were to materialize, would make a small dent in the massive investment challenge facing Europe. The main question, however, is how such a narrowly-financed scheme can generate an increment to private investment of the scale being targeted. While a leverage ratio of 15 to 1 seems overly optimistic, the focus on investment is a welcome step in the right direction.