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European Commission President Jean-Claude Juncker's plan to boost investment in the EU has three pillars:

1. the creation of a European Fund for Strategic Investment (EFSI);
2. the setting up of a pipeline of projects at EU level and strengthening technical assistance through an investment advisory 'Hub';
3. and  improving the framework conditions for investment.

Much comment so far has focused on the first part, and in particular the multiplier used. The ESFI will be given €21 billion of public funds: €8 billion from the EU budget, forming a 50 percent guarantee, and another €5 billion from the European Investment Bank, which will also bring in its expertise in project selection. Then, in order to get to a promised total of €315 billion, the plan critically hinges on mobilising and leveraging an additional €294 billion in private investment, meaning €15 in private money for each €1 of public money committed.

There is much scepticism if this 1:15 multiplier is realistic, particularly as private funding needs to be 'additional' – it should not crowd out already planned investments. Claeys, Sapir and Wolff in a Bruegel blogpost and  have already highlighted this additionality problem: will the right projects be selected that would not have happened without the guarantee? They stress how critical the expertise and independence of the project selection committee will be to select the right 'additional' projects and to avoid the trap of political capture.

Which projects should be selected? Claeys, Sapir and Wolff show that the multiplier effect will be higher the more risky the projects: it is particularly the risky projects that are most likely to have been left on the shelf during the crisis and can be activated without risk of crowding out. Although the Juncker Plan specifies “there should be no thematic or geographic pre-allocations” it does mention infrastructure, notably broadband, energy networks and transport infrastructure, education, research and innovation, and renewable energy and energy efficiency. There should be enough scope in each of these areas – though not only these areas – to find risky projects.

Of the €21 billion, €5 billion will be allocated to small and medium sized companies. This SME part is assumed to have the same 1:15 multiplier, implying a similar risk requirement to the other parts of the ESFI. Rather than ringfencing SMEs in general, it would have been better to ringfence the subset of young firms with high growth potential , if at all there should be any ringfencing. It is precisely these firms that typically offer much riskier innovative projects. Lacking resources and reputation they are typically find it harder to access finance, especially in the current European financial market situation of a low appetite for risk funding.

Project selection should also focus on projects that meet both the additionality criteria and which have the highest social rates of return. After all, what matters is not just how much private investment can be leveraged, but how much growth and employment can be created from these investments. All this underlines the need for high quality independent governance of the ESFI, and a monitoring and evaluation strategy specified from the start, if the plan has any serious chance of reaching the 1:15 multiplier and making a meaningful impact on growth and jobs for the EU economy.

This is especially the case because the EU public funds that will go into EFSI, ie the €8 billion, is not new money, but money shifted from other parts of the EU budget. And, although not clearly stipulated in Juncker’s plan, but probable, the same holds for the €5 billion from the EIB. This introduces an 'opportunity cost' component to the calcuations, ie what the social returns from the additional investment will be above what would have come from their original spending allocation. The case has to made that the shifted money is spent better in the new Juncker plan compared to the original allocation, but the Juncker plan is silent on this. How sizeable these opportunity costs are will depend on the specifics of where the money is coming from. According to the Juncker plan, the €8 billion will come from the Connecting Europe Facility (€3.3 billion), Horizon 2020 (€2.7 billion) and budget margin (€2 billion). It is particularly concerning that the money is being taken from the parts of the EU budget that probably have the greatest potential for multiplier effects similar to what ESFI aspires. For example, public investment in basic science projects like those funded through the European Research Council, have been shown to be able to generate substantial social rates of return . In fact, the text of Juncker's plan notes that the 1:15 multiplier “is a prudent average, based on historical experience from EU programmes and the EIB.” Where is this historical evidence from if not research spending and projects such as the Connecting Europe Facility?!

All this implies that the mission for the project selection committee will be to select projects with a 1:15 multiplier effect in excess of the multiplier effect from the Connecting Europe Facility and Horizon 2020. Their job would be much easier if the money came from other parts of the EU budget with lower opportunity costs.

Taking into account this Achilles’ heel, the third pillar of Juncker's plan – improving the framework conditions for investment – becomes all the more pivotal in order to mobilise the envisaged private investment. The multifaceted problem of low investment in Europe goes beyond lack of finance. Private investors are also shunning Europe because of lower rates of return . Juncker's plan therefore needs to provide a credible commitment to improve the investment climate, if the required 1:15 multiplier is to be secured.

Unfortunately, unlike the first and second parts of the plan, the third strand does not come with milestones and a time line, which make it less powerful to convince the private sector that the investment climate will be made sufficiently better in future.

Furthermore, does the third strand of the plan address the right conditions for increasing investment in Europe? It mentions as the most important areas banking union and capital market union, and better regulation and single market progress in energy, transport and digital sectors. It also mentions in particular addressing those barriers affecting SMEs. While these areas are not contested, what is remarkably low on the plan's radar are the framework conditions related to research and innovation. The plan only mentions that “to boost research and innovation, EU competitiveness would benefit from fewer barriers to knowledge transfer, open access to scientific research and greater mobility of researchers,” but offers no concrete new ideas on how to improve this and no milestones or timetable.

This is remarkable, because it is particularly these areas that will be the areas of strength of Europe in future. As an illustration, in Ernst & Young's latest European attractiveness survey (2014) , 45 percent out of 808 CEO respondents think that R&D will be the driving force for Europe’s attractiveness to foreign direct investment. They rate as Europe’s most attractive feature its stability and predictable business environment (44 percent), its capacity for innovation (38 percent), a large customer base (31 percent) and the quality of its labour force (31 percent).

The plan, by taking away money from H2020, jeopardises the stock of high quality public R&D infrastructure and researchers being trained on the frontier of research and supported in their intra-EU mobility. It is this stock that firms are looking for when deciding whether to locate their risky R&D-based investments to the EU rather than elsewhere.   The H2020 is a critical framework condition for the risky projects with high growth aspirations, the target with the highest potential for the 1:15-multiplier.

Taking away funds from the H2020 for the ESFI is therefore cutting in the 1:15 multiplier potential of the Plan.

To conclude, when asked to endorse the plan, the Council of the EU and the European Parliament should:

• Ask for a clear evaluation strategy embedded in the plan from the start; this would evaluate ESFI and holding its management accountable for selecting the projects with the required additionality and (social) rates of return, taking into account the opportunity costs of the public funds used.
• Ask for a re-focus within the dedicated SME window onto risky projects carried out by firms with high innovation-based growth potential.
• Ask for a rethink of which parts of the EU budget the EU contribution should come from; criteria for this would be the multiplier effect/(social) rates of return of the current funding allocations;
• At least, EFSI should not take linearly away from the Connecting Europe Facility and H2020, but should only remove money from the parts of these programmes with the lowest opportunity cost.
• Ask for a clear proposal for the third part of the plan, addressing the critical framework conditions for investment with concrete policies, accompanied by deadlines and milestones.