The European Investment Bank and the European Bank for Reconstruction and Development have failed to prevent corruption and social injustice

The European Union plan for financial aid to the southern Mediterranean region risks perpetuating the same corruption and social injustice that the pro-democracy movement in north Africa and the Middle East rebelled against.

Beyond the countless declarations of support for those pro-democracy struggles, and the military intervention in Libya, the EU is also planning on spending money to support democratisation and development in the region.

The strategy drafted by the European commission and discussed on 24 and 25 March by EU leaders in Brussels includes a plan to channel €7bn ($9.9bn) to the southern Mediterranean during the next three years, through loans made by the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).

The EIB is effectively the EU’s house bank, and through its lending it is charged with financially supporting the EU’s policy objectives and mandates in the regions where it operates. The EBRD was created 20 years ago to support transition to democracy and market economy in post-socialist countries. While the two institutions operate in line with broad EU political mandates, they control the design and management of their investment portfolios themselves.

The banks access their investment capital from the financial markets, but it is UK taxpayers and their peers in other EU countries who underwrite this capital – the UK, Germany, Italy and France are the largest shareholders in the EIB, each with a shareholding and subscribed capital of up to 17%.

The EIB and the EBRD are publicly owned banks, and together they invest about €80bn each year on behalf of EU citizens.

Why, then, has there been no public discussion over the planned role of the two banks in the Mediterranean region? The EIB and the EBRD may be hardly known to the European public, but that does not decrease the impacts of the projects they finance.

The EIB’s loans should benefit local populations in the countries that receive them, but it has weak safeguards in place to ensure that this happens. One example comes from Zambia: the bank made a €48m loan to the Mopani copper mine, the country’s second largest and majority owned by the Switzerland-based multinational firm Glencore, but the Zambian tax authority said in February that its draft independent audit revealed “irregularities” in its 2008 tax submission. The tax office said the company may have inflated costs and evaded taxes – in some cases pricing copper at 25% below international market value. Glencore, the sole buyer of the mine’s copper, is contesting the revenue department’s provisional assessment, but Zambia‘s Institute of Chartered Accountants is considering punitive action against the mining firm’s accountants.

The EIB has been operating in the Mediterranean since 1979. Almost €10bn of the total of €23bn invested by the bank in the region over the past three decades has gone to Egypt and Tunisia.

Out of €1.87bn lent by the EIB to Egypt between 2006 and 2010, 92% was directed at energy projects – and four-fifths of this to promote fossil fuels. Of the €1.8bn lent to Tunisia in the same period, half went to energy projects, and 10% was invested in infrastructure for transporting gas to Italy. Big infrastructure projects – especially in countries with undemocratic and corrupt leaderships such as those in pre-revolutionary Egypt and Tunisia – are often white elephants, benefiting a few politically well-connected people, and rarely the populations they aim to serve.

When the EIB tries to reach small and medium enterprises – SMEs form a large part of the EU strategy for “sustainable and inclusive growth” in the southern Mediterranean region – it performs poorly. A Counter Balance report published in November last year says that millions of euros of its loans in Africa do not reach SMEs but instead end up in tax havens and in the hands of corrupt elites.

The EBRD, meanwhile, is mandated to support economic transition to market economy and political transition to democracy, but it has clearly focused on the former at the expense of the latter. In view of potential investments in the Mediterranean region, it is relevant to look at the effects of EBRD loans on resource-rich central Asian nations, such as Azerbaijan. Here, the EBRD’s investments are skewed towards oil and natural gas projects, but these loans have potentially brought the country the “Dutch disease” – a phrase used by the Economist magazine to explain the “loss of competitiveness in the non-oil economy prompted by exchange-rate appreciation and other factors”, high inflation, and potentially making the country a net importer of food.

Additionally, the bank is only in the very early stages of evaluating its work’s impact on alleviating poverty and gender inequality – hardly a vote of confidence for sending the 20-year-old bank into a region where these issues are more important than ever. Even the UK Department for International Development warned that “operating in fragile situations is not the EBRD’s specific strength”.

At their worst, these European public bank loans have fattened the bank accounts of European corporations operating through tax havens. At their best, they have contributed to GDP growth but this has not necessarily resulted in the fair distribution of wealth, combating corruption, civic empowerment or real environmental and social sustainability.

Since the financial crisis began in 2007, Europe’s banking sector is being monitored more closely. But if we Europeans claim to support pro-democracy movements in the Mediterranean region, we should also carefully scrutinise what our public banks have done in the past in that area, and elsewhere in the world, before claiming to be helping others with the EIB and EBRD as the agents of that help.

• Desislava Stoyanova is the co-ordinator for Counter Balance and the EIB project co-ordinator for CEE Bankwatch Network