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Using innovative financial instruments to finance EU policies and objectives

AUTHORS: Jorge Núñez Ferrer – Axel Volkery – Sirini Withana – Keti Medarova-Bergstrom

The European Union’s objectives and aspirations have greatly increased in the last two decades, while the Union’s budget has shrunk in real terms as a percentage of Gross National Income. The introduction of financial instruments that combine EU-budget support with loans from the European Investment Bank and the European Investment Fund, as well as from other financial institutions, is seen as one way of expanding the reach and increasing the effectiveness of the EU budget. The financial and sovereign debt crisis has also increased the need for innovative financial solutions to the weakening credit market for public infrastructures, research and development and small and medium-sized enterprises (SMEs). While EU-level financial instruments cannot fill the vacuum created by the credit crunch and the sovereign debt crisis, they can offer specific support in terms of growth and job creation for areas with European added value and that are capable of providing significant long-term returns. Moreover, these instruments open up a new space for institutions and levels of power to collaborate, and facilitate the pooling of resources and development of common standards across the EU. These indirect benefits of well-devised mechanisms can create considerable efficiencies of scale.

The current Multiannual Financial Framework for 2007 to 2013 introduced an unprecedented number (more than 20) of so-called ‘innovative financial instruments’. Although only 1.3 per cent of EU-budget resources were allocated to these instruments, this relatively small amount enables the European Investment Bank Group and other lenders to multiply the original budget contribution by a factor of more than 30 in the forms of loans in certain instances. Positive evaluations of these instruments have encouraged the European Commission to propose expanding the size and scope of the existing instruments, to introduce ambitious new instruments, and to reform and consolidate the overall delivery architecture.

In order to reach the Europe 2020 Strategy objectives, the EU has proposed to consolidate centrally controlled financial instruments into six instruments. These instruments include the Risk-Sharing Finance Facility for research and innovation; equity and guarantees for innovative SMEs, microfinance, education and culture; and instruments for transport and energy. This report examines Commission proposals on the use of innovative financial instruments in the 2014-2020 budget and analyses implications for the financing of EU policies and objectives.

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