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18 November 2014

Where will #TeamJuncker EU find €300 billion by Xmas for the new investment fund?

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Graham Bishop answers the question about who has the deepest pockets to make a contribution.

Questions raised:

  • Financial Times: French Finance Minister Emmanuel Macron said France wanted the EU to come up with €60bn-€80bn in cash as part of the overall plan – far more than is currently under consideration – to directly finance investments or provide equity capital for projects.

  • Reuters: So the Commission plans to use what little public money is available to lure bigger private funds into projects that would otherwise seem too risky or with too low a rate of return. "Our aim is to 'crowd in' private money for big infrastructure projects in the energy sector, transport, broadband or research and development. The private sector cannot take all the risks," Commission Vice President Jyrki Katainen told Reuters. Structural funds that poorer EU countries receive could be leveraged in a similar way as with EU project bonds, under which EU cash becomes a first loss guarantee on a debt issue from private investors, he said.

  • Financial Times: According to officials, and documents seen by the Financial Times, the structure most favoured by the commission would use public money as a “first-loss tranche” in new special purpose vehicles. The EU would take most of the downside risks from any investment, while allowing private investors to benefit from any financial gains. Several funds with different risk profiles could be offered.

An answer:

A glance at Insurance Europe’s table of private sector assets (see below) indicates clearly who has the deep pockets! However, it is not that simple as the insurance industry is split between life and non-life. The latter typically holds shorter-term assets to pay claims. Life premiums of €661 billion are about 60% of total premiums so crudely applying the same split to the assets suggests that EU life companies have about €5,000 billion of assets and about 70% of that is at management’s investment discretion. Just over half the assets are in fixed income/loans - a pool of around €2,000 billion.  

Team Juncker is looking for a €300 billion fund to invest over the next three years so 5% of life premiums could make a €100 billion contribution. BUT there must be a caveat: that money might otherwise go into government bonds to finance `routine’ deficits. How much better for the EU’s productive potential if it went directly into investments that would genuinely raise productivity! Who better to judge than real long-term investors instead of short-term governments looking to the next election? Step forward the insurance industry… (and stimulating the pension funds and retail investors?)

© Graham Bishop

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