How the Juncker Plan (EFSI) and the European Investment Bank relate to the UK

Today I will be looking at two features of the European Union set-up which are ones which are substantially backed by the UK. They are interrelated and depending how you look at it are examples of something which is a glass half-full or a glass half-empty. I have looked at both the Juncker Plan and the European Investment Bank (EIB)  before but not for a while. So it is time for a review and to point out some facts about two enormous organisations which get quite little media attention apart from press communiques.

The European Investment Bank (EIB)

Let us remind ourselves about the size and scale of the EIB.

Capital: From less than ECU 30bn in the early 1990s, our capital-base rose to EUR 243bn at 1st July 2013. The capital adequacy ratio was 28.7% at the end of 2013.

Thus we see that a lot of capital is employed even for these inflated times which begs the question of what is done with it?

Lending: From ECU 10bn in 1988, our annual lending neared EUR 45bn in the mid-2000s before jumping to EUR 79bn in 2009 as a temporary response to the crisis. It was EUR77.5bn in 2015.

There is something of a checking query here because if the boom in lending in 2009 was “a temporary response” why has it risen again in 2015? Indeed as it promised a further 94 billion of loans in 2015 we may be seeing a new peak although we are not told if that is temporary as well. Also if we look at its latest programs there is an implication that it cannot find enough investment projects in Europe despite its name. From its twitter feed this week.

W/ a €250 loan, a Jordanian woman created a thriving handicraft shop

Supporting replacement of 27 obsolete bridges in rural districts

EUR 20M lending to support the Kyrgyz Republic’s water and solid waste infrastructure.

Since 2008, we’ve supported 14 forestry projects across China to help tackle

I thought that China was supposed to be suffering from an excess of investment! Well not according to the EIB anyway. In total it does this.

Partner countries: We made our first agreements with non-Member States and non-European countries in the early 1960s. Now we work with over 150 non-EU states which receive around 10% of our funding.

The EIB invests in what it considers worthy areas such as environment,infrastructure, innovation ( defined by its civil servants) and smaller businesses. This does beg a question for the UK in a way as we do not seem to be seeing funding flowing to smaller businesses yet apparently both the Bank of England and the EIB are on the case.

Where does the money come from?

The shareholders of the European Investment Bank are the 28 Member States of the European Union…..Each Member State’s share in the Bank’s capital is based on its economic weight within the European Union (expressed in GDP) at the time of its accession.

The UK is one of the 4 largest shareholders and provides some 39.2 billion Euros of capital to the EIB or 16.1% of it. Back on the 26th of November 2014 I explained.

Some of you may be wondering where this shows up in the UK ONS Public Finances report? Well it does not as it only appears when it is unavoidable,excuse me, losses are declared. At what point I wonder would they ever declare a loss? Much easier to say it is about to turn a corner.

Also there is thew awkward issue of how exactly countries like Greece can be considered to be providing capital .Has it been loaned to them.

Also the EIB borrows money using our backing.

Under its Statute, the Bank is authorised to have maximum loans outstanding equivalent to two and a half times its capital.

How much?

Its annual funding programme for 2016 is EUR 60 billion (with a global borrowing authorisation up to EUR 65 billion).

As we do not account for the capital we are certainly not going to be accounting for the borrowing on top of that. This makes it the perfect program for politicians as rather like the IMF it appears free until one day it is not in a binary style system of “Surprise,Surprise”. What could go wrong?

The Juncker Plan

This was quickly renamed the European Fund for Strategic Investments or EFSI which begs a question as to why an egotist like Jean-Claude Juncker dropped his name from what he calls a success.

By mobilising private sector investment, the initial £16.2 billion (€21bn) of EU-EIB funding is on track to deliver at least £229.8 billion (€315bn) of additional investments by mid-2018.

Those who have followed the saga of the economic depression in Greece will feel a sharp chill up and down their spines as they recall what “on track” meant there. Also there was an awkward moment for the theme of success at the ECB press conference yesterday when its President Mario Draghi told us that economic growth had slowed.

As for the UK then the official view is this.

In its first year, the UK has been the  third largest beneficiary of EFSI funds in the EU and the host of one in eight major projects. To date, agreements have been approved with 15 UK-based intermediaries projected to trigger £4.3 billion (€5.6bn) in investment via 9,472 British SMEs.

The £1 billion for Smart Meters troubles me as I fail to see that they offer. This is on my mind as my supplier has just offered me one but what do I actually gain? Also is this just another example of governments shifting spending off-balance sheet?

The construction of the state-of-the-art Midland Metropolitan Hospital in Birmingham, at a cost of £350 million (€468m), which will create 666 hospital beds.

The last “innovation” was the Private Finance Initiative which turned out to be ruinously expensive off-balance sheet financing. Also if the UK is doing so well out of this then how can the statement below also be true?

In a gesture of solidarity, the money from this plan was largely to be used in the South of Europe, in the countries worst affected by the crisis. (EuroActiv.Fr)

How is the EFSI financed?

Here is Juncker’s explanation which appears to be from Alice In Wonderland.

The Commission has put up €8 billion from the EU budget. This backs up a €16 billion guarantee given to the Fund. Topped up by another €5 billion from the EIB. That makes €21 billion.With a €21 billion reserve, the EIB can give out loans of €63 billion. That’s €63 billion of fresh financing we’ve just injected into the economy. But the EIB will not be acting alone. The EIB will be financing the riskier parts of projects worth 315 billion, meaning private investors will be pitching in the remaining €252 billion.

As I pointed out that means this.

The EU Commission is only putting up £8 billion of actual cash at which point we have a leverage rate of 39. That is a little different to the implied leverage ratio of 3 is it not? If we include the capital provided by the European Investment Bank or EIB we reduce the leverage ratio to 25. If we also chuck in the guarantees as we mull the difference between a guarantee and capital the leverage ratio falls to what feels like a mere 15! What could go wrong?

Also you may like to mull this bit.

Thanks to , the EIB can take higher risks and develop new products to fill market gaps” ( @MarcolnBxl)

In practice such leverage does not seem to have been achieved as the latest numbers show that 12.8 billion Euros has generated an expected investment of 100 billion. So a ratio of around 8 as we note the word “expected”.

Comment

There is much to consider here especially as we consider past Euro area projects such as the EFSF. It was highly leveraged claimed to be “on track” and then was replaced by the ESM as Greece continued its economic depression. Also there was the Barroso project of earlier years which mostly seemed to recycle old plans and replace private investment which would have happened anyway. I note that Jan Schneider reviews it thus.

one participant drew a parallel between today’s discussions around investment and those anticipating the Lisbon agenda devised in 2000. Back then, the buzzword used to be ‘Innovation’. We know today that innovation wasn’t the magic solution to all of Europe’s problems. We therefore need to be wary of ‘Investment’ becoming the new ‘Innovation’.

Actually as the EIB trumpets “innovation” it has not learned much at all it would appear! So whilst some investment would be welcome there are a host of hurdles to be overcome for this to work especially as other schemes such as Horizon 2020 were replaced by this. Who defines investment for a start? Also is it mostly a rebadging of what would have happened anyway? Then we get to the highly leveraged financing.

 

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16 thoughts on “How the Juncker Plan (EFSI) and the European Investment Bank relate to the UK

  1. Shaun, this looks very much to me like the UK is financing support for the Euro zone I.e the Sothern Europeans, which we were told would not happen as we are not in the Euro. I’m afraid I do not trust the EU not to be ‘creative’ with its accounting and expenditure.

    • Hi Pavlaki
      You put your finger on the problem. The core of the EU is the Eurozone economically. If the UK stays in the EU it will have to be drawn further and further into the eurozone , financially and economically. GBP may retain its name but will be fixed to the euro to all intents and purposes. As the federalisation of the eurozone is ‘baked in’ if it intends to survive, the UK will face a much more difficult ‘extraction’ choice in a few years time , if it is not to be a fully integrated federal state.
      As you remark the path to this near future is littered with creative accounting to camoflague ( not particularly well) this direction of travel.
      June 23 is unlikely to the last decision point, unless all pretence at democracy is relinquished, which is unfortunately increasingly likely.

  2. I am really pleased that you put the spotlight on these wretched quangos.
    I have spent the last thirty years starting up new companies in life sciences. I have learnt the hard way that:
    1. Never ever ever deal with a government institution that wishes to promote innovation. They actually want to promote themselves as promoting innovation to look good;
    2. No government institution EVER knows anything about innovation. So, they appoint intermediaries as experts. These experts simply direct funds to areas of their own interest;
    3. The bureaucracy is ASTOUNDING. On one grant application, we had to fill in dozens and dozens of pages, not about the project to be funded, but
    a) How many women we employed;
    b) how many of these are in senior positions;
    c) how much the women earned versus men in the same jobs;
    d) The same questions for ethnic minorities;
    e) the same questions for disabled;
    f) stacks of questions on health and safety issues; and, worst of all, if it is a EU grant of any sort, you HAVE to collaborate across three countries in the EU to be considered. This simply results in entirely phoney collaborations to fool the bureaucrats.
    The idea that anything like these banks will do anything except dish out money to the companies which grease up to politicians and bureaucrats (or, as you probably know, pay the dozens of consultancies which do nothing except get grants on your behalf for a cut) is frankly risible.
    As part of all of these grants and loans, you have to produce a rigid business plan. What politicians don’t get is that innovation does not work like that. Amazingly, you are doing something that has not been done before. The hint is in the name innovation.
    For the last ten years, I have implemented a policy that forbids anyone in my companies wasting time on government projects or government-backed schemes of any sort. We are doing just fine without them.
    Rant over. Great blog!

    • Your problem is that you are honest business trying to do things correctly! The EU has just announced (The Times today) it has paid out Euro 888 million in fraudulent aid claims – mainly to Romania, Bulgaria and Hungary in 2015. This is down from E901million in 2014. Total to date is E2.5 billion. Just think what you could do with that!!

      • Well technically if he is using EU funding meant to promote collaboration between EU countries, he is not a “honest business trying to do things correctly” in fact he should be included in the figures you mentioned since he openly admits his application was fraudulent.

        • James posted he would not deal with such schemes

          if he did he would be richer and no doubt knighted !

          Forbin

        • Nice one, you are of course correct but it is always difficult to go against the crowd becoming a “Notayesman” especially on “Notayesman” type blogs like this where most commenters seem to be in agreement, somehow defying the blog’s title.

          Forbin I believe James’ point 3 denies your posit for his first 20 years unless he did not follow through and send off the applications.

          Don’t get me wrong, I’m not trying to score points here. I believe in sticking to evidence and facts, leaving the fantasy for the Establishment and the MSM, although it would be refreshing to see more evidence and fact based challenges on this blog.

        • Er my first post didn’t read right as it was in fact directed to the cookie monster but looks as if it’s addressed to James – apologies….

  3. Hi Shaun
    Thankyou for an interesting blog and for
    refreshing my memory on another euro-ponzi
    scheme.
    I got details of the latest Natwest savings
    rates today, and although 1% is still poor, it is still
    quite an upward move.

    http://personal.natwest.com/content/dam/natwest_com/savings/downloads/SavingDocs/premium-saver-info-sheet.pdf

    I see that Barclays are offering 0.6% so is it possible
    that a trend has been set and we could see negative base rates
    with more reasonable savings rates?

    JRH

    • if the BoE goes MIRP expect bail-ins to follow shortly

      if they then go onto negative rates for savings – expect currency limits

      all bets off after that !

      Forbin

      PS: kiss goodbye to any pesnion pot – I wonder how the Irish ones are doing ….

    • Hi JRH

      I thought I would reply as you are agreeing with the dataset the Bank of England published earlier this week.

      “the rate for households’ new time deposits increased by 3bps to 1.31%. (April)

      I haven’t seen it myself in what I do for my mum after my father’s death so fingers crossed…

    • Hi Forbin

      Looking at this sort of thing requires a fair bit more than copy and pasting. Mind you City AM in its new incarnation might be publishing some of its PR puff pieces. From The Drum.

      “City AM will no longer be produced solely by the staff team (the company is 69-strong). From now on, articles will also be generated by a raft of new ‘contributors’, paid according to the number of page views they generate, and – most controversially – by corporate brands and their advertising and communications chiefs, who will be given direct access to the content management system (CMS) of the newspaper’s website.

  4. I suppose its one of the big questions that if by strange chance the British voting public do vote to leave the EU/ franko-german empire , then what would happen to these schemes?

    hmm, no wonder they’re all frightened of the prospect !

    Should we vote in I guess we’ll be paying throug the nose like the German tax payer but without the benifit of their supported economy ……

    give is six months after the yes vote and we’ll be using euros ….

    Forbin

  5. Hi Shaun – “To date, agreements have been approved with 15 UK-based intermediaries projected to trigger £4.3 billion (€5.6bn) in investment via 9,472 British SMEs.”

    A possible explanation for the lack of SME lending under the Bank of England’s Funding for Lending Scheme?

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