A brave new European World Bank?

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Although the EIB already lends more annually than the World Bank (€79 billion in 2009), it lends only a small proportion of this, approximately 10%, outside Europe. The EIB has a far lower public profile than the World Bank and as a result has avoided the levels of public scrutiny the World Bank has been subject to. However, the EU is increasingly seeking to increase its international political profile and has begun looking at the tools it has available. The EIB is seen as a tool the EU has at its disposal to improve the EU’s image in the developing world and the European Parliament have expressed a desire for the EIB to raise the profile of its activities outside Europe.

As part of a review  of the structure of the activities of the EIB outside Europe, a panel of experts led by Michel Camdessus (formerly managing director of the IMF) has suggested significant changes that need to be made to the EIB’s operations outside Europe in the next three years and has also proposed dramatic reforms to the structure of the EIB and other European financial institutions. One of these suggestions would be to create a ‘European Bank for Cooperation and Development’ that would amalgamate the external lending activities of the EIB with the EBRD and the European Commission’s budgetary funds.
A number of NGOs are concerned that the EIB’s current activities outside Europe do not constitute genuine development lending but instead function to promote European interests and European companies operating abroad. There are concerns that the EIB’s comparatively tiny staff is not capable of delivering increased volumes of lending effectively, that the impact of the EIB’s lending outside Europe is not effectively assessed or monitored and that far from benefitting local populations, EIB projects often do considerable environmental and social damage.

Short-term proposals:

The focus of the Camdessus review was on changes that should be made to the EIB between now and 2014; it recognised that the Bank’s policy objectives are currently confused and contradictory and called for clarification of the objectives of the EIB’s external lending activities. The review also called for the EIB and the European Commission to improve their communication and co-operation; the Commission have statutory rights to scrutinise the EIB’s work but the review recognised that the current relationship between the Bank and the Commission does not enable the Commission to carry out this role effectively. Other suggestions included a significant increase in EIB staff capacity and expertise in operating outside Europe and providing development finance.

One of the ways in which the review suggested improving co-ordination between the Commission and the EIB was through the creation of an ‘EU platform for external cooperation and development’ which would co-ordinate the provision of funding by the EU, EIB, EBRD, the Council of Europe Development Bank and other European bilateral financial institutions. The aim would be for this to improve the coherence of EU finance and to enable these institutions to contribute expertise to support each other.

Although the review recognised a lack of clarity in the EIB’s lending objectives, the recommendations focused on the need for the Bank to further European policy objectives. Comments made by the Budget Committee of the European Parliament when the report was presented confirmed the political intention to use the EIB as a foreign policy tool. This does not sit well with the EIB’s legal obligation to lend in accordance with EU development objectives when operating outside Europe which was confirmed by the European Court of Justice in 2008.

The EIB’s activities outside Europe have been heavily criticised for furthering the interests of European companies rather than encouraging local development and there is concern that decisions about the provision of finance will be politically influenced and not necessarily made in the interests of recipient countries.

Counter Balance, a coalition of NGOs working to challenge the lending practices of the EIB, have responded to the Camdessus report. The Counter Balance report is heavily critical of the EIB’s existing lending practices and provides examples of cases in which the EIB’s activities outside Europe have caused significant social and environmental damage. Counter Balance have called for all EIB lending outside Europe to be halted on the basis that the EIB is structurally and culturally unsuited to providing development finance and other financial institutions should be used to channel the EU’s development funds more effectively. Their report is available here.

Climate change lending:

The Camdessus report has recommended the EIB’s external lending mandate should be increased by €2 billion, to be spent before 2014, and that this additional money should be used solely to fund climate change related projects.  The report recommended the EIB should use this money to fund both climate change mitigation and adaptation, and that projects throughout the countries the EIB supports under the external lending mandate should be eligible. African countries are excluded from this mandate as they are supported under a separate agreement.

NGOs have raised concerns about the ethics of Europe, as a significant contributor to climate change emissions, lending rather than donating money to developing countries to help them adapt to climate change. Counter Balance have suggested that if the mandate is increased by €2 billion as suggested, any profits generated by this additional revenue should be channelled to other financial institutions who have a strong record of delivering effective development finance.

Medium and long term reform of EU development finance:

Although it was outside the intended scope of the review, Michel Camdessus and his colleagues took the opportunity to comment on ways in which the EU could reform development lending and with it, the EIB. The review suggested creating an ‘EU platform for external cooperation and development’ in the short term and in the longer term combining this with either a ‘European Agency for external financing’ which would co-ordinate the use of EIB and EU Commission funds, or a ‘European Bank for Cooperation and Development’ which would pool funds from the EIB, EBRD, Commission and other bilateral institutions and create a major new development bank.

Both of these proposals are aimed at improving the coherence of EU development funding and allowing each of the institutions involved to play to their strengths, for example drawing on the development experience of the EBRD, the policy expertise of the Commission and the investment capabilities of the EIB. The European Bank for Cooperation and Development would be intended to function as a high profile international financial institution.

Whether or not these suggestions will be adopted remains to be seen and feasibility studies are likely to be commissioned shortly. However suggestions of ways in which the EU can increase, or even improve, its profile internationally are likely to be well received by European politicians.

The concern is that as a European institution with a mandate to operate in European interests and to further European foreign policy objectives, such a European Bank for Cooperation and Development could never operate effectively as a development bank. Even the World Bank, which the EU is seeking to emulate precisely because it is interpreted as operating as an American foreign policy tool, has a mixture of developed and developing countries on the board of the Bank. The board of any such European Bank would only include representatives of European member states.

The clue’s in the name

The EIB is first and foremost an investment bank and as such the culture of the Bank is not well suited to providing development finance. It faces an uphill battle to transform itself from an investment bank to a credible development bank of any size, let alone a major player in the provision of development finance.

Building a good reputation in development finance is not easy and the experience of the World Bank Group has shown that reforming an institution with questionable development credentials is extremely difficult. There are justifiable concerns that the EIB’s external lending is currently at best confused and at worst seriously damaging to recipient countries, communities and the environment and that the EIB is not capable of being transformed into a credible development lending institution in either the short or the longer term.

The Commission are due to make a proposal in April regarding the future of EIB external lending up to 2014 and a decision will be taken by the European Parliament and Council in 2011. Discussions about the longer term future of the EIB and other development finance will continue in the political arena for some time and concrete proposals are likely to be put forward in 2011 or 2012.

If, and it’s a big IF, plans to use the EIB and the EBRD to create a new financial institution comparable to the World Bank go ahead, the European institutions will need to be very careful indeed that they are not seen to be using development finance as a tool to further European interests without taking the needs of developing countries into account.

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