Europe’s secret €25 billion Covid response fund

The European Investment Bank (EIB) is pumping tens of billions into the European economy to help businesses recover from the Covid-19 pandemic. However, the secrecy around how it is spent is posing acute problems of accountability.

Businesses in Europe are struggling in the wake of Covid-19. Social restrictions imposed over the winter to inhibit the spread of the Omicron variant damaged many companies getting back on their feet after previous Covid waves. Surging energy prices and continuing supply chain disruption are also continuing to stifle economic recovery, not to mention the effects of conflict in Ukraine.

Support from EU institutions had become essential to people and businesses during the pandemic. The European Commission’s NextGenerationEU recovery package took the limelight when it was announced in 2020 to provide this support, as did the monetary stimulus from the European Central Bank.

Yet these were not the only EU institutions to respond. The EIB also announced measures to help keep the European economy afloat, albeit with less fanfare than its sister institutions.

The EIB’s European Guarantee Fund (EGF) may have received less attention, yet the amount of money mobilised is still significant. It is an initial €25 billion reserve which aims to mobilise investments worth €200 billion for the European economy. The initial funding was agreed by the governments of 22 of the 27 EU member states, with Czechia, Estonia, Hungary, Latvia and Romania choosing not to take part.

In theory, the EIB and European Investment Fund (which combined form the EIB Group) are channelling the EGF to Small and Medium Enterprises (SMEs) across Europe. In practice, this is mainly being done by providing massive credit lines, guarantees and other complex financial instruments to commercial and public banks and investment funds, so they in turn can pass it on to the private sector.

So what could possibly be wrong with an extra €200 billion of investments for struggling businesses during the biggest financial crisis in a generation?

Counter Balance sought to assess the EGF one year after its creation in our latest report. What we found is that the EGF is so shrouded in secrecy that it is difficult to assess its impacts. As a result, tens of billions of Euros in public money is being spent with minimal scrutiny or debate.

Apart from generic statements about the money going to SMEs or mid-sized companies, it is impossible to find out exactly how banks and investment funds are using the EGF. A list of transactions funded by the EGF on the EIB website does not state the exact amount of money transferred to recipient banks and funds, what type of projects will be financed and what social or environmental clauses (if any) were attached. Ultimately, there is a risk that projects with harmful environmental and social impacts get public financial support without any public scrutiny.

This casts doubt on whether SMEs in desperate need of EGF funding will truly benefit from it, or if the benefits will mostly be enjoyed by the financial sector itself. This could turn large amounts of the EGF into a blank cheque for commercial banks.

If it is unclear how much support European SMEs will receive in reality, it is impossible to tell whether the EGF was even necessary to begin with. Without more transparency from the EIB Group, we may never know if the same results could have been achieved without using huge amounts of public money.

The EIB Group should not be able to do as it pleases with the hard-earned money of ordinary people. It must earn the European public’s trust. By increasing the transparency around the EGF, both the EIB and the European Investment Fund can prove this initiative is an effective use of public money to help Europe recover from the pandemic.

Discussions over the potential permanent roll-out of the EGF are due to take place in the near future. Counter Balance is calling on European institutions to increase their scrutiny and carefully examine how the fund is used. Rather than supporting the economy in the wake of Covid-19, if left unchecked the EGF could instead morph into a hidden bailout for the financial sector, without the European public even knowing.