Brussels is looking to carve out a greater role for the EU in the coronavirus recovery by drawing up a fund to take equity stakes in systemic companies.
European Commission Vice President ValdisDombrovskis said that the EU executive is still weighing up what form this share-buying fund would take.
He said, however, that it would be particularly important to bolster companies in poorer EU member countries that do not have the massive firepower of France and Germany to pump cash into national champions.
“We need to support those countries which cannot respond so strongly with this equity support instrument,” the Latvian said, but stressed that the Commission could still change its thinking.
It is unusual for the Commission to take such an active interest in acquiring equity as that brings with it both the corporate influence and the risks more frequently assumed by the national governments and wealth funds. Indeed, one of the key unresolved questions about the equity-fund is its governance structure.
The fund would be part of a recovery cash pot linked to the EU’s next seven-year budget, designed to kickstart the bloc’s economy once the pandemic subsides.
In a blueprint for the next budget, Commission notes that “the novel Multiannual Financial Framework (MFF) for the next seven years will enable the union to … repair the single market including by supporting key economic sectors, restoring healthcare systems and reinforcing economic resilience with the creation of a new Solvency Support Instrument for restoring [the] capital of European companies starting already in 2020.”
To finance such a fund, there would be a new investment scheme under the InvestEU program managed by the European Investment Bank. It would aim to “develop a Solvency Support Instrument” with €16 billion that should act as seed capital to spur investments of €200 billion. All figures are bracketed, meaning they are subject to change.
Given the need to try to maintain an even recovery across the 27 member countries and stop the single market fragmenting, Dombrovskis pointed to highly indebted Southern and Eastern nations with underdeveloped economies as prime candidates for equity support. But this support needs to be selective.
“It won’t be possible to cover all EU companies across the board,” he argued. “We’ll need to be targeted. One will need to see what companies, what sectors, need this reinforcement most.”
France is a fan. The French treasury this week sent a position paper to other capitals calling for “an equity fund” that can recapitalize businesses or buy shares in important companies.
The French argued the scheme would be tailored “especially for those operating in European strategic value chains,” and added that this policy would also help “prevent non-EU hostile acquisitions,” apparently responding to concerns that Chinese and Gulf investors will take advantage of tumbling stock prices in Europe to buy up assets.
Paris wrote, however, that EU countries should have a joint role with the Commission in deciding which companies get access to public money. According to the paper, EU countries would be responsible for drafting “national recovery plans,” which would need a green light from Brussels.
Part of what these plans could finance (with a mix of national and EU money) would be “an equity fund either to recapitalize or to acquire shares in strategic companies that need capital, especially for those operating in European strategic value chains … in the form of equity and/or hybrid capital instruments,” the French paper said.
European Economy Commissioner Paolo Gentiloni said on Wednesday the Commission is looking at “a pan-European tool also on equities, what kind of companies, etcetera, etcetera; this I think could be a good tool to rebalance the risk of these imbalances.”
Dombrovskis stopped short of explaining the mechanics behind the equity fund, which he said is “still to be worked out.”
Indirect support could come by providing guarantees or “facilitating private investment in equity,” Dombrovskis said. “But what’s clear with a crisis this deep, affecting all member states, that kind of support will be needed.”