Over the next three years, the European Commission is planning to channel seven billion euro for the Southern Mediterranean through the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD). But the track record of these two banks raises serious questions over their ability to support democratisation in the region.

The Commission proposal on aid to the Mediterranean – debated in the European Council of March 24-25 – says that EU support will be centered on democratic institution building, combating corruption, empowering civil society and fostering sustainable and inclusive growth. The Commission is confident that the EIB and the EBRD can play an important role in these spheres. While the two European public banks operate on vague political mandates from the EU, it is the banks themselves that control the design and management of their investment portfolios -- EU political institutions exercise limited control over the actual banking activities. A more careful look at the past activities of the two banks indicates that they may not be able to meet the expectations of the Commission as regards the Mediterranean region.

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

Out of 1.87 billion euros lent by the EIB to Egypt between 2006 and 2010, 92 percent were directed to energy projects -- four fifths of this to promoting fossil fuels. Of the 1.8 billion euros lent to Tunisia in the same period, half went to energy projects, and ten percent was invested in infrastructure for transporting gas to Italy. These figures are a clear indication of the unbalanced lending portfolio of the bank. While such lending is in line with EU energy import interests, it is less clear how it brings any added value in the areas of democratisation and sustainable development.

Although the EIB is mandated to promote development in beneficiary countries, there is scarcely any lending to health and education in the bank’s record for Egypt and Tunisia.

The EIB’s understanding of development has been a narrow one. As elsewhere, the EIB has evaluated the progress of North African economies only on the basis of GDP growth, paying no attention to the internal distribution of wealth.

In other African countries, money lent by the EIB has ended up in European tax havens. An independent audit commissioned by the Zambian tax authority, publicized this year, shows that a EUR 48 million loan by the EIB to Zambian Mopani copper mine has fattened the Swiss bank accounts of the Swiss company owning Mopani. This example indicates that the EIB has weak safeguards in place to ensure its loans indeed benefit local populations in receiving countries.

Social exclusion, inequality and corruption have been root causes of the revolutions in the Mediterranean. Given that the EIB’s track record in these areas has been doubtful, the EU should at least review past EIB lending practices before putting the bank forward as a tool for democratization in the Southern Mediterranean. The EBRD, in its turn, was created 20 years ago to support transition in post-socialist countries, a mission it is pursuing with mixed results.

In view of potential investments in the Southern, it is particularly relevant to look at effects of EBRD loans to resource-rich Central Asian countries. In Azerbaidjan, EBRD investments skewed towards energy infrastructure have been one of the pushes leading the country closer to Dutch disease (a diagnosis given by the IMF last year, implying that the boom in energy exports has had a detrimental effect on other sectors of the economy, such as manufacture, which have a role in poverty alleviation). Meanwhile, the country has made scant progress towards improved democracy, transparency and pluralism, even though the EBRD is in theory supporting both economic transition to market economy and political transition to democracy.

Given that the EBRD has no expertise in dealing with politically unstable contexts and that its poverty reduction and human rights record is shaky even in those countries it was designed to aid, the EU should consider pausing before giving the bank a lending role in the Mediterranean. At least until the bank figures out the means to include social and environmental concerns in its lending. European banking – one of the main instruments singled out by the EU to support democracy in the Mediterranean – may have contributed to economic growth in beneficiary countries but this has not resulted in the fair distribution of wealth, combating corruption, civic empowerment or real environmental and social sustainability. It is implausible to claim European banking can suddenly achieve different results in the Mediterranean.

Fidanka Bacheva is Southeast Europe coordinator at CEE Bankwatch Network, an NGO monitoring the social and environmental impacts of international development finance in Central and Eastern Europe.