6

Europe’s Shadow Budget

MUNICH – More details about the European Commission’s €315 billion ($390 billion) investment plan for 2015-2017 have finally come to light. The program, announced by European Commission President Jean-Claude Juncker in November, amounts to a massive shadow budget, twice as large as the European Union’s annual official budget, that will finance public investment projects and ultimately help governments circumvent debt limits established in the Stability and Growth Pact.

The borrowing will be arranged through the new European Fund for Strategic Investment, operating under the umbrella of the European Investment Bank. The EFSI will be equipped with €5 billion in start-up capital, produced through the revaluation of existing EIB assets, and will be backed by €16 billion in guarantees from the European Commission. The fund is expected to leverage this to acquire roughly €63 billion in loans, with private investors subsequently contributing some €5 for every euro lent – bringing total investment to the €315 billion target.

Though EU countries will not contribute any actual funds, they will provide implicit and explicit guarantees for the private investors, in an arrangement that looks suspiciously like the joint liability embodied by Eurobonds. Faced with German Chancellor Angela Merkel’s categorical rejection of Eurobonds, the EU engaged a horde of financial specialists to find a creative way to circumvent it. They came up with the EFSI.

Though the fund will not be operational until mid-2015, EU member countries have already proposed projects for the European Commission’s consideration. By early December, all 28 EU governments had submitted applications – and they are still coming.