The EU’s multi-annual financial framework could rely more on financial instruments leveraged through the European Investment Bank

Financial instruments could account for a bigger portion of the next EU budget, compared to grants and subsidies, because they allow more money to be given for important projects and draw private investment, according to participants at a conference organised by the EU bank.

With the European Commission about to propose an EU budget for the coming years, known as the multi-annual financial framework, “the talk around town is that 10% of the budget could be financial instruments,” Alexander Stubb, vice president of the European Investment Bank, told the conference in Brussels on February 1.

Financial instruments are loans and guarantees which can be used instead of, or together with, more traditional budgetary measures such as grants and subsidies. For example, under the Juncker Plan, the EIB has a guarantee from the EU budget that allows it to make riskier loans to private companies and public sector entities, which then also benefit from additional private sector financing. The plan aims to mobilise EUR 500 billion with a far smaller budget commitment.

“The Juncker Plan is a courageous departure from budgetary measures towards financial instruments, which has paid off,” said EIB President Werner Hoyer at the conference, which was titled “Doing more with less: The case for financial instruments in the next multi-annual EU budget”.

The Juncker Plan “has also changed the culture of the bank to be able to better deal with such instruments,” Hoyer said.

The need to do more with less stems most prominently from Brexit, as the EU will lose the UK’s budgetary contribution. However, not everyone at the conference agreed with the “less” part. Jan Olbrycht, a Polish Member of the European Parliament, proposed an increase in “budgetary contributions to 1.3% of the GDP of member states. Let’s do more with more!”

3 main areas of debate

The size of the budget will definitely be the main issue for debate. Then will come the debate over the priorities that should be financed. Finally, how to finance them—either with traditional budgetary measures, or with financial instruments.

The decisions on priorities and financing will not be easy. Ryan Heath, senior EU correspondent at Politico moderated one of the conference panels. He noted that the grants and subsidies underlining both the common agricultural policy, and the structural funds dealing with regional cohesion are sacred cows for many. “Is the Commission willing to slaughter the sacred cows, and introduce more financial instruments instead of these grants and subsidies?” he asked.

The response from Klaus-Heiner Lehne, president of the European Court of Auditors, was that the EU would “not slaughter these holy cows, but put them on diet.”

Arguments for financial instruments

The Court of Auditors has done two reports on financial instruments. Lehne said the reports show that the success rate of projects benefiting from financial instruments is typically much higher than projects benefiting from grants or subsidies, because the projects have to be bankable. That could make the shift in financing more attractive to political leaders.