The European Investment Bank (EIB) has a major role in the European Commission's investment plan but a fundamental reform of the lender is needed if it is to be an effective driver of economic recovery. EU finance ministers need to talk more than just numbers when they meet on Tuesday in their capacity of Governors of the ‘EU Bank’.
This is the third time the EIB is in the front line of getting Europe’s economy back on track. If its first two attempts to tackle the crisis passed relatively unnoticed, it is not because they were insignificant in terms of lending volume but rather because they were largely ineffective.
In the first move, the annual lending of the bank was raised from about €50 billion in 2008 to almost €80 billion in 2011. Then a new capital increase in early 2013 was to boost the EIB’s lending again by €60 billion over the next three years.
This time around the bank will be largely responsible for mobilising €315 billion. Yet there is no guarantee that it will be any more effective.
This does not prevent policy-makers and economists from calling for a stronger and bigger EIB without considering how it can be made an effective actor, able to turn these billions of euros in to tangible results.
Transparency and accountability
Transparency is generally seen as a precondition for good governance. But the EIB’s previous crisis approach is flawed by a lack of it.
In 2014, more than €20 billion were targeted for SMEs through intermediated lending but it remains unknown which businesses benefitted and what the results were.
The European Parliament and civil society organisations have repeatedly called on the bank to improve its transparency and reporting standards.
Currently it is one of the worst performing financial institutions on the Aid Transparency Index and things might get worse. The draft version of its new transparency policy, which is expected to be adopted soom, proposes further exemptions to its information disclosure obligations.
If the EIB wants to provide oxygen to economies which have been suffocated by clientelism and rent-seeking elites, it is indispensible to enhance its accountability towards the EU institutions – via scrutiny from the European Court of Auditors – and EU citizens through a more independent complaints mechanism and a strengthened role for the European Ombudsman.
Recent cases in Italy, where the bank supported two projects allegedly linked to the mafia, prove its vulnerability to possible abuses of its funds.
Risky financial mechanisms in the making
The EIB is seen by many leftist economics and politicians as an ideal tool to finance a modern New Deal.
Nevertheless they seem to overlook the risks linked to the new financial mechanisms increasingly developed by the EIB to mobilise private money and which will be central to the €315 billion Juncker plan.
Rather than financing projects with public money, the EIB 'de-risks' projects to attract private investors. This means increased exposure to financial markets and if something goes wrong the public will take the losses.
In other words the EIB aims to get us out of the crisis with a mechanism that follows the same logic that caused the trouble in the first place: privatising profits, socialising debt.
Simply relying on leveraging and de-risking is not sufficient to provide stable and long term finance for the right projects. For instance, the refinancing of a gas storage facility in Spain will cost Spanish citizens €1.4 billion through their tax bills after the project had to be halted and the government was forced to take over the debt.
This project was financed through EU project bonds – an initiative, engineered by the European Commission and the EIB and likely to be extended to sectors like health and education.
Finally investments have to be directed strategically to sustainable projects which are beneficial in the long run. At the time being the EIB is lacking clear policy priorities to fully contribute to the European objectives of reduction of greenhouse gases emissions by 2030 and 2050.
In its new energy policy, the EIB made a positive step forward by excluding support for coal projects, yet investments in fossil fuels and carbon-intensive sectors remain significant and undermine the achievements of the EIB’s climate action programme.
Its upcoming climate policy review provides the opportunity to set clear priorities in line with EU biodiversity and climate change objectives.
EU finance ministers should reckon that economic transformation is not just a matter of throwing money at a problem, it requires good governance, responsible finance and a sustainable vision for the future.
With the EIB, they have a tool at hand which needs to be reformed if to be part of a pan-European solution to the many crises we are facing.
Xavier Sol is director of Counter Balance, a coalition of NGOs