Juncker’s €300bn plan needs to provide equity & debtBy Anne Glover on 27 November 2014
Jean-Claude Juncker’s proposal for a European investment fund to breathe new life into Europe’s economies as well as create jobs for millions of citizens is a bold initiative. The plan is to earmark some €21bn of EU funds for investments in business and infrastructure, which the European Commission President hopes will leverage in more than €300bn coming from the private sector. But having outlined the mechanism for leveraging its own commitment, Europe will need to ensure that the right framework is in place to welcome investors.
The planned European Fund for Strategic Investments (EFSI) is Juncker’s first major initiative since taking office in November. It’s a strong signal that the new executive is intent on stimulating growth across Europe and recognises the immense challenges still facing much of the continent, as growth projections are cut and the threat of deflation rises.
The critical challenge will be to ensure that the capital available is used wisely to deliver maximum impact for the long term. And that means ensuring three things:
First, the EFSI must not become a ‘lending plan’. Debt plays a vital role in any economy, and borrowers clearly still have problems accessing credit in many parts of Europe. But companies also need equity – permanent financing that provides a strong foundation on which to develop. For smaller, innovative companies – the type so often backed by venture capital – with few assets against which to secure lending and unpredictable cash flows, equity finance is essential.
It is therefore encouraging that Juncker’s vision identifies equity in general and venture capital for SMEs more specifically as part of the solution. Invest Europe will continue to work with the Commission, the European Parliament and the Member States to ensure that capital gets through.
Second, the plan’s stated commitment to fund innovation needs to be delivered. As important as it is to renew Europe’s transport and energy infrastructure, for example, we also need to be funding the companies that will deliver growth over the next generation. Some of this innovation will come from publicly-funded bodies or from building new research infrastructure, but much of it needs to come from the private sector. The plan therefore needs to support innovative companies, as well as fund primary research.
Third, we need a better regulatory and tax regime in Europe for private sector investment in order to make the EU the destination for global – not just European – investors. The private equity industry in Europe is exceptional at attracting global capital to support the world-class companies that Invest Europe members are backing, but Europe’s policymakers need to recognise our continent is competing with dynamic economies in the Americas, Asia, and increasingly Africa for scarce investment. Excessive capital charges for investors; barriers to cross-border flows of capital; and tax policies that raise the cost of capital are all negative factors that can offset any advantages that would flow from a new investment plan.
Finally, it is a considerable achievement that President Juncker has delivered on his commitment to produce an investment plan within the first weeks of his mandate. The EFSI presents a strong outline and has much to commend it. But to meet its objectives, it needs to be part of bigger package of reforms that will make Europe truly the destination for global investors.
The European Commission's Questions and Answers on the investment plan.