Let’s start by taking stock: With respect to macroeconomic developments, pre-Brexit baseline expectations for the EU suggested a continuation of the moderate recovery for 2016. Investment had picked up in the winter half, with the investment plan being one of the factors supporting this trend. By mid-June, about a third of EFSI’s key target – trigger EUR 315 bn in investment in three years – had been reached according to estimates by the institutions and the political discussion about continuing EFSI beyond its initial time horizon had already begun.*
As for the UK in particular, the country had been supporting the investment plan for instance by pledging GBP 6 bn in co-financing as well as benefitting from EFSI funds. By mid 2016, seven infrastructure and innovation projects were envisaged, amounting to EUR 1.9 bn in EFSI financing, expected to trigger EUR 8.2 bn in investment and create a substantial amount of jobs over a multi-year period. Via the European Investment Fund’s (EIF) EFSI activities to support SME’s, 10 financing agreements with intermediaries had been approved. The Commission expected this to trigger EUR 3.6 bn in investment and benefit about more than 1,000 firms.** Together, EFSI-related activity in the UK amounted to about 11% of total expected investment volumes.*** In addition, there are several projects planned to involve multiple countries also including the UK.
Both the EIB and the EIF were quick to emphasize that at present the Brexit vote would not imply changes to project operations. This also reflects that until Art. 50 gets triggered and during the two-year period of negotiating exit, the UK would remain a member with „full rights and obligations“. However, it is worthwhile to keep in mind that EFSI does not work by allocating funds based on geographic quotas. It relies on projects being put forward for financing – both by private and public actors – and building up cooperation with intermediaries in member states. Even if the Brexit vote would imply little changes to operations already under way****, it is likely to reduce the enthusiasm for new UK projects being put forward while the country is negotiating its way out and might make the EIB and EIF more cautious, too given uncertainties with respect to the future development of UK-EU relationships.
What about effects on the EU27-UK? On the one hand, the Brexit vote meant a shock and raised uncertainty. It lowered the Union’s growth outlook and increased sensitivity to political risks – altogether no good news for investment. Hence, the main objective of generating a substantial amount of additional investment arguably becomes harder to reach as a result of the Brexit vote. On the other, the plan itself may in fact be more important than before. In an upside scenario, the Brexit shock could even provide an impetus to the plan’s lagging 3rd pillar, i.e. reforms to improve the investment environment in member states and help to push progress on flagship initiatives like the digital single market. At the project level, getting EFSI support could be seen as a „seal of approval“, and serve as a confidence-building signal that is now particularly valuable to get things off the ground. Last but not least, Brexit is going to impact on the discussion about EFSI’s future beyond 2018. Much suggests that it rather strengthens the case for continuation due to higher uncertainty, a more moderate mid-term outlook and the willingness to instil investor confidence as well as demonstrating Europe’s value added via concrete projects against this backdrop.
Yet, how to provide the means for a future EFSI is somewhat complicated by the Brexit vote. EFSI’s capacity is based on a guarantee from the EU budget (EUR 16 bn) and a EUR 5 bn allocation of the EIB’s own capital. The EIB also provides additional financing for EFSI projects. A Brexit would likely mean fewer overall budgetary resources and potentially lower financing capacity for the EIB itself as the bank could lose one of its largest shareholders.