Last Wednesday Jean-Claude Juncker, the president of the European Commission, announced his plan to create a €315 billion ‘European Fund for Strategic Investment’ to try to stimulate the European economy. It will take the form of an investment fund; €21 billion will be taken from the EU budget and the European Investment Bank to act as the fund’s capital. This will be used to offer guarantees that will reduce risk for private investors. The hope is that this will stimulate private lending to infrastructure and research and development, and take the value of investment over €300 billion.
That figure looks impressive, but the fund is unlikely to have much impact on growth. This is because it has been designed to avoid any new public borrowing for investment. There is no new public spending – pre-existing funds are being shuffled into the programme. So new spending will have to come as a result of loans from the private sector. Juncker hopes that the capital of the fund can be ‘leveraged’ by 15 times, meaning that the value of private lending will dwarf the public capital that has been committed. This would be double the leverage ratio of the European Stability Mechanism, and infrastructure investments are often more risky than lending to governments, which should reduce private investors’ willingness to lend to the fund. Finally, member-states can inject more capital into the fund if they wish, and these investments will be excluded from their deficit targets under the eurozone’s fiscal rules. But they are unlikely to do so, since the European Investment Bank will pick the projects that will be funded, and so governments’ capital will be mostly used in other member-states.
