BRUSSELS/STRASOURG The European Commission agreed on Tuesday to set up a new fund with 21 billion euros ($26 billion) of capital that it hopes can unlock some 300 billion euros of largely private investment over three years to create a million jobs.
The European Fund for Strategic Investment (EFSI) will be presented to the European Parliament in Strasbourg on Wednesday by Commission President Jean-Claude Juncker, who pledged before taking office this month to drive 300 billion euros into infrastructure projects to revive growth.
With most of the bloc's 28 governments curbing spending to cut debt, the prospect of a major injection of capital that might jolt Europe out of stagnation was welcomed in financial markets - though the plan itself involves no new EU money.
Alone, the Commission estimates it might add just 1 percentage point to economic growth each year for the next three years. But the hope, in Brussels and national capitals, is that it can lift a pervasive sense of gloom.
In essence, EU officials said, the new Fund operated with the European Investment Bank (EIB) will act as a "risk buffer", soaking up losses on projects before other creditors. The Commission hopes that will break down their reluctance to invest at a time when many banks and other institutions are awash with cheap cash being offered by the European Central Bank (ECB).
"We believe this plan is credible," one EU official said. "We are not counting on money falling from the sky."
Money could be available by mid-2015, with priority going to projects including international transport, energy and data networks, small firms and ventures that employ young people.
The total amount of forecast investment generated could be greater if EU governments also chose to pay in capital, which would not count as deficit spending under EU budgetary rules.
However, governments will not able to specify what projects the EFSI can support most effectively, or where. That will be done by a technical panel, while the EIB provides expertise to ensure worthy ventures are capable of attracting private funds.
The EIB, owned by EU member states and with assets of some 500 billion euros, will add 5 billion euros to the capital of the EFSI, and a further 16 billion will be in the form of a guarantee from the European Union.
The EU will back that guarantee by making a provision in its accounts for 8 billion euros that were previously earmarked for grants to support transport, energy and data networks and research and innovation.
CATALYST FOR PRIVATE INVESTMENT
Officials estimate that the 21 billion euros of EFSI capital will allow the EIB and its small-business arm, the European Investment Fund (EIF), to increase their financing to projects by three times as much, or 63 billion euros, over three years. That, in turn, could tempt in five times as much from other investors.
A total "multiplier" of 15 times the initial capital to create 315 billion euros of investment was realistic, officials said, citing a multiplier of 18 from past EIB capital increases.
Last year, the EIB lent some 72 billion euros.
The Commission hopes to add a cumulative 330 to 410 billion euros to gross domestic product over three years, equivalent to 0.75 to 1 percent a year. Investment last year accounted for 17 percent of GDP.
Officials said the plan may create 1.0 to 1.3 million jobs, a sizeable chunk of the Union's 25 million unemployed.
Markus Beyrer, director general of the trade body Business Europe, said he expected it to succeed in leveraging private investment, adding: "The Juncker Plan is a very good start."
At the OECD, the association of industrial states that has been urging the EU to promote growth, chief economist Catherine Mann said that, while the final effect was hard to quantify, it was better not to spend hundreds of billions in public money.
"The 315 billion is like a cloud number, it's up in the clouds. There's much more limited actual cash on the table," she said. "But to the extent that it can catalyse private investment, that's actually better."
(Writing by Alastair Macdonald; Editing by Kevin Liffey)