‘Blended Finance’ a Way-Out of the Current EU Budget Negotiations?

Current EU budget negotiations are turning into another tortuous battle. This blogpost examines whether the involvement of private investors in delivering regional investment may offer a way out of the stalemate.

Negotiations over the EU budget – the Multiannual Financial Framework (MFF) – are usually tough battles stretching over several years. As it did seven years ago, the European Council now faces a standoff between the “frugal four” – Austria, Denmark, the Netherlands and Sweden – and the “Friends of Cohesion”, such as the Visegrád Group and member states in South (East) Europe. Whereas the former are net contributing countries to the EU budget, the latter group consists of member states with weaker economies that benefit especially from the Common Agricultural Policy (CAP) and the Cohesion Policy (CP). If the frugal four have it their way, budget contributions will be reduced to 1% of gross national income. Also, in their opinion, the CAP and the CP should be cut significantly since “standing up for common values does not have a price tag” (2020)as Austrian Chancellor Sebastian Kurz recently reaffirmed.

It seems that at a time when Brexit is leaving a €75 billion dent in budget contributions and fiscal consolidation remains a shared EU goal, EU wide investment and transfer policies are not particularly blessed with good fortune. In tight budget situations such as this one, the German economic sociologist Wolfgang Streeck sees a higher involvement of private investors in financing state activities as a logical consequence (2015). Indeed, the Commission seems to be squaring the circle by relying more and more on financial instruments (FIs). Unlike traditional governmental grants, FIs consist of loans, equity and guarantees and involve private actors in state finance activities.

In 2014, former commission president Jean-Claude Juncker implemented the €315bn Juncker Plan as a response to the European crisis and to kick-start Europe’s crippling economies. His successor Ursula von der Leyen only recently attached a €1tn price tag to her flagship project, the Green Deal, to achieve climate neutrality by 2050. This sum almost amounts to the total €1,06tn EU budget of 2014-2020. Yet, whereas the Fund’s references to the Marshall Fund and the New Deal might suggest a comeback of Keynesian-like economics, these two large-scale investment projects actually utilize limited public contributions leveraged by crowding in private investments. State guarantees thereby play a pivotal role in securing private investors against potential financial losses and thus make investments more attractive. This interlinks public and private funds; hence, we speak of blended finance.

Take the Green Deal’s Just Transition Fund, for example. Just as the Cohesion Policy aims to tackle economic disparities through structural investments, the Just Transition Fund aims to assist coal regions that face structural challenges and need “to make bigger efforts in this transformation”, as von der Leyen recently stated (European Commission, 2020).

Based on €7.5bn allocated from the EU budget, the plan is to crowd in additional private capital to reach €100bn in total through guarantees by the European Investment Bank (EIB). The Juncker Plan and its sequel, the InvestEU project, intend to crowd in 15 times of the initial funds that the EU budget and the EIB provided to reach €315bn and €500bn respectively.

Thus, rather than counteracting adverse market effects, these financial instruments rely heavily on the willingness of market forces. Daniela Gabor, Benjamin Braun and Marina Hübner describe this strategy as governing through financial markets: “[…] the EU policy-making state is increasingly using the market for governance purposes. […] To govern through financial markets is to engineer and re-purpose financial instruments and markets as instruments of statecraft, with the goal of achieving economic policy goals at minimum fiscal cost” (2018, pp. 103–104). Yet, these reduced costs of course come with a higher government dependency on private actors concerning the realization of state projects.


Leveraged EU Funds; a way out of the negotiation deadlock?

It would be misleading to portray these new ways of conducting state investments as a one-on-one substitution for a grant-based system such as Cohesion Policy. Indeed, the EIB described the relationship between the two as complementary (Fi-compass, 2015).

Yet, as a way to overcome the current stalemate between the member states, blended finance could potentially reduce the contributions by economically strong member states whilst funneling increasing leveraged sums to net beneficiary members. A classical win-win situation one might think – but the Friends of Cohesion should remain sceptical.

During the last budget negotiations in 2013, the net contributing MS (back then known as the “Friends of Better Spending”) demanded greater involvement by the EIB in the financing of regional investment policies in combinantion with a reduced budget. Subsequent statements of the German Ministry of Finance and the EIB President Werner Hoyer regarded the Juncker Plan as a continuation of the better spending approach. Furthermore, the Commission’s encouragement to double the amount of FIs used in the Cohesion Policy led to a steady expansion of project based blended finance. Daniel Mertens and Matthias Thiemann have tracked this development back to the 1980s (2018, 2019). In light of these developments, the European Think Tanks Group recently speculated that “given the likelihood of a reduced budget, innovative finance instruments such as blending are considered to become increasingly important” (2020).

However, it remains an open question in how far projects based on blended finance can actually raise the purported private investments, channel them where they are needed and achieve goals which go beyond generating profits. The EU’s Court of Auditors termed the success of the Juncker Plan “exaggerated” and questioned the ability to raise such high sums of additional private investments. The analysis of Anguelov and his colleagues of the deployment of JESSICA in Bulgaria – an early financialized EU programme – has revealed how the need to achieve a return on investments conflicted with the project’s social welfare intentions (Anguelov et al., 2018). In addition to that, further research is needed to examine the effects financial instruments have within the regions more broadly and on the territorial cohesion between regions in Europe.

Time will tell whether the supposed complementarity will turn into a rivalry between the two “different intervention philosophies”, as Walther Deffaa, former head of DG REGIO, has described the grant-based and blended finance mechanisms (2016, p. 262). Given the permanent conflict between mostly contributing and receiving member states, a steady expansion of blended finance instiruments seems more likely than a radical shift. In any case, the concept of blended finance as a means for regional development will most likely remain a much debated topic.

It seems like the Friends of Cohesion have realized this too. In their recent meeting in Beja, Portugal they concluded that “The creation of new instruments such as […] the Just Transition Fund is relevant to pursue specific goals, additional to those of Cohesion Policy. […] Their funding should come on top of the Commission’s proposal and not be made at the expense of Cohesion Policy and the Common Agricultural Policy” (2020, par. 4, own emphasis).



Anguelov, D., Leitner, H., & Sheppard, E. (2018). Engineering the Financialization of Urban Entrpreneurialism: The JESSICA Urban Development Initiative in the European Union. International Journal of Urban and Regional Research, 42(4), 573–593. https://doi.org/10.1111/1468-2427.12590

Braun, B., Gabor, D., Hu, M., & Hübner, M. (2018). Governing through financial markets: Towards a critical political economy of Capital Markets Union. Competition and Change, 22(2), 101–116. https://doi.org/10.1177/1024529418759476

Deffaa, W. (2016). The new generation of structural and investment funds – More than financial transfers? Intereconomics, 51(3), 155–163. https://doi.org/10.1007/s10272-016-0594-y

European Commission. (2020). Launching the Just Transition Mechanism – for a green transition based on solidarity and fairness. https://ec.europa.eu/info/news/launching-just-transition-mechanism-green-transition-based-solidarity-and-fairness-2020-jan-15_en

European Think Tanks Group. (2020). EU Budget negotiations: the ‘frugal five’ and development policy.

Fi-compass. (2015). EFSI and ESIF: Complementarity, not overlap.

Friends of Cohesion. (2020). Friends of Cohesion JOINT DECLARATION on the Multiannual Financial Framework 2021-2027. https://www.portugal.gov.pt/download-ficheiros/ficheiro.aspx?v=c6825828-42dc-4090-8378-929c760c58a3

Kurz, S. (2020). The ‘frugal four’ advocate a responsible EU budget. Financial Times. https://www.ft.com/content/7faae690-4e65-11ea-95a0-43d18ec715f5

Mertens, D., & Thiemann, M. (2018). Market-based but state-led: The role of public development banks in shaping market-based finance in the European Union. Competition and Change, 22(2), 184–204. https://doi.org/10.1177/1024529418758479

Mertens, D., & Thiemann, M. (2019). Building a hidden investment state? The European Investment Bank, national development banks and European economic governance. Journal of European Public Policy, 26(1), 23–43. https://doi.org/10.1080/13501763.2017.1382556

Streeck, W. (2015). The Rise of the European Consolidation State Wolfgang Streeck MPIfG Discussion Paper. MPIfG Discussion Paper, 15(1).