A better return for our money

The European Investment Bank (EIB), the EU’s publicity-shy house bank, has shot to prominence in recent weeks as the global economic crisis has deepened. Nationally and collectively, EU leaders have scrambled to boost lending to small businesses that are being hit by the credit crunch. José Manuel Barroso, the president of the European Commission, has talked up the role the EIB could play in responding to the crisis; Günter Verheugen, the industry commissioner, wants the EIB to offer a €40 billion soft-loan package to the European car industry; and the UK’s finance minister, Alistair Darling, has been pushing UK banks to make the most of the EIB’s increased loans facility for small and medium-sized enterprises (SMEs).

But in the run-up to this weekend’s financial reform summit in Washington DC, with vastly improved regulation of the international financial system likely to top the agenda, major question marks over how and to what ends the EIB is allowed to operate should give EU decision-makers pause to reflect before they funnel even more funds through it.

The prominence of the EIB and other international financial institutions amid the wreckage of buccaneer deregulated capitalism and its excesses is a clear indication of the utility of public money in a crisis and in general – and such trying circumstances bring with them the need to consider how to make the most of the higher added value that public money now offers.

Last month’s emergency Paris meeting of EU leaders saw the ‘EIB button’ being pressed in a big, new way. By 2011, as agreed by the member states, the EIB is to provide €30 billion in loans to SMEs within Europe, distributed via intermediary commercial banks. UK Prime Minister Gordon Brown referred to the new financing arrangement as “front-loading” the EIB.

However, just last week, a European Court of Justice (ECJ) ruling on another sizable chunk of the EIB’s portfolio – loans in EU accession and neighbourhood countries, as well as in Asia and Latin America – found that the bank has been failing to deliver good value. In its decision to annul the EIB’s external lending mandate (though it gave the bank a 12-month period of grace in which to re-define its mandate in tandem with the Commission and, significantly, the European Parliament), the ECJ confirmed that the EIB is obliged to fulfil European development-policy objectives and implied that the EIB is deploying less than rigorously a Community guarantee of €27.8 billion that the EIB currently has at its disposal for that purpose.

The EIB has long been dogged by accusations that it has been less than rigorous and accountable in its pursuit of EU policy goals, no more so than in its lending to SMEs. It has been heavily engaged in this sector for 40 years via its ‘Global Loans’ facility. At almost €57 billion in the past five years, such loans account for the second-biggest tranche of its investment.

Again, like the EIB’s other operational priorities, these global loans are supposed to support EU policies, an aim backed up with billions of Community-guaranteed funds. But, as critics have pointed out, these loans are, effectively, unsupervised. Intermediary banks have, for example, been unwilling to share information on, say, the environmental standards attached to their on-lending to SMEs, and it has been impossible to learn if EIB or EU policies are being followed, let alone fulfilled.

One example of how this multi-billion euro black hole functions involves the EIB’s lending for renewable-energy projects, a sector in which the bank has been making important, positive strides in recent years. Following the EIB’s announcement in 2004 that, between 1999 and 2003, it extended loans of €300 million to small and medium-sized renewables projects (out of total €1.6 billion for the sector), Bankwatch approached 386 intermediary banks for a simple list of such projects being financed by the EIB. None of the 73 banks that responded provided evidence that they had financed a concrete renewable-energy project, even though the EIB had pointed to them as having provided financing for renewables.

Now, as detailed at length on the EIB’s website, the emergency injection of capital for this form of financing brings with it a new lending formula – “EIB loan for SMEs” – and a bank claim “to do more but also to do better”. The new system will be “simpler, more flexible and more transparent”, to the benefit of even more SMEs than before.

So what does this new dawn of transparency involve? Nothing more than the commercial banks being compelled to spell out to recipients that they have received a soft loan from the EIB. The hiring of a couple of new staff in its plush new Luxembourg headquarters and the setting up of intelligent database tracking of the loans does not appear to feature in the bank’s new scheme of things. Moreover, the EIB is heaping all the responsibility onto the commercial banks for the bulk of these transactions, stating “it will be entirely up to the intermediary bank to decide whether or not to grant a loan to the SME”.

For one thing, given that public trust in the private banking sector’s decision-making has all but evaporated, how shrewd a move is this? Despite government bail-outs and other efforts to improve liquidity in the financial markets, the banks have SMEs over a barrel and are squeezing them hard. Colin Borland, of the Federation of Small Businesses in Scotland, has said: “The banks are trying to recoup as much money as they can and they are not too bothered about how they are going about it.”

Secondly, in the current climate, it is difficult to imagine that EU policy goals will be uppermost in the minds of account managers when they pass on EIB loans to SMEs. That’s assuming that the banks actually do respond to governmental pleading to take the EIB’s available funding and pass on to business customers the full discount, one aspect of the EIB’s added value.

This brings us to the crux of what should be, we believe, the fundamental debate within the EU about the EIB. In all the recent media coverage describing the avalanche of cash that the EIB has at its disposal to offset the crippling effects of the economic crisis, there has been no consideration of how best to target these fantastic resources to achieve long-term, sustainable economic and social prosperity. Yes, recession is biting already and unemployment is rising. But if the crisis has taught us anything, it is that splashing the cash in panic mode, with threadbare regulation and oversight, is no longer an option.

As reported in the Financial Times this week, the European Commission views this recession as a potential turning point, where governments must get strategic in how they set about boosting the development of long-term, job-creating, assured solutions such as environment-friendly technologies. We have heard from the International Energy Agency today, in its World Energy Outlook, that current carbon-heavy energy trends are “patently unsustainable – socially, environmentally, economically.”

As shareholders in the EIB, EU governments should resist the temptation to view the EIB serving small businesses merely as a last-ditch cash cow, and instead insist on far better targeted, socially responsible and, ultimately, measurable investment behaviour from the EU’s prime lending arm. In essence, let’s hear less about quantity and let’s see much more quality.

It is precisely this festering uncertainty about how the EIB approaches its responsibilities that brought the ECJ to rule in favour of giving the European Parliament more oversight of the policy and external lending practices of the bank. The court noted: “Participation by the Parliament in that process [co-deciding the new external mandate] is a reflection, at the Community level, of the fundamental democratic principle that the people should participate in the exercise of power through the intermediary of a representative assembly.”

Legal analysis of this judgment is being carried out on behalf of Counter Balance to assess what potential it offers for the EIB’s operations to be dragged farther into the democratic realm. With its unaccountable black hole lending pursuits, the EIB has the potential to make much more drama out of this crisis.

Desislava Stoyanova is the co-ordinator for Counter Balance: Challenging the European Investment Bank, a campaign coalition comprising European NGOs that have tracked the EIB’s investment activities in recent years.