November 27, 2014


How to leverage a zero: Jean-Claude Juncker edition

The only hope we had was that the leaks in the last few days had deliberately underestimated the number, so that Jean-Claude Juncker could have pulled out a rabbit out of his hat yesterday. No rabbit. It was exactly as the leaks suggested. There will be exactly zero upfront cash – to be levered upwards to €315bn – a multiple of 315 divided by zero. There will be a guarantee of €16bn from the EU budget, and €5bn from the European Investment Bank, which makes for a multiple of 15 – which we would describe as north of crazy.

Here is the Commission’s table on the main breakdown of this measure from its main press release:


Risk Bearing Capacity

Multiplier (averaged)

Investment in the real economy

Long-term investments




SMEs & mid-cap companies

5 bn







The EU guarantee will be created under the EU budget, and backed by existing margins from the following areas:


  • existing margins of the EU budget (€2bn);
  • the Connecting Europe Facility (€ 3.3bn);
  • the Horizon 2020 programme (€2.7bn).


That only makes €8bn, which we presume means that the remaining €8bn are not explicitly backed, but somehow accounted for in the budget. It would be important to have more clarity and especially the legal details about this equity tranche. Will the Commission have to vote on it to release it if a loss arises?

Apart from the set-up of the fund, the Commission will start work on a project pipeline to channel the money where it is most needed. And there will also be a plan to make Europe more attractive to foreign investors. The EFSI’s main investments will be in the areas of infrastructure, including broadband and energy networks, transportation, industrial infrastructure; education, R&D; renewable energy and in SMEs and middle capitalisation companies.

On the timelime: The idea is for the European Council and the European Parliament to endorse the plan by December. The investment projects are to be proposed by a joint Commission-EIB task force. The fund should be up and running by mid-2015.

In his speech to the European Parliament, Jean-Claude Juncker made a revealing comment. He does not want the public sector to put up any more debt. As important as the plan may be, the deficit and debt rules are more important. Here is how he put it:

“I often hear that we need 'fresh' money. What I believe we really need is a fresh start and fresh investment. Others say we need more debt. We do not. National budgets are already stretched. The EU operates on balanced budgets and the abundant liquidity can allow Europe to grow without creating new debt. We will not betray our children and grandchildren and write more checks that they will ultimately have to pay off. We will not betray the rules of the Stability and Growth Pact that we have agreed jointly – this is a matter of credibility. However, if Member States chip in capital to the Fund, we will not take these contributions into account in our assessments under the Pact.”

Our other stories

We also have stories on the resignation of the Spanish health minister, on the failure of the latest talks between Greece and its creditors; a timeframe for QE; Renzi’s proposal for a New Deal; and about what countries need to do before they embark on financial integration (and guess who is not doing it?)

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