European Investment Bank and the economic crisis “Counter Balance – Challenging the European Investment Bank” is a campaign promoted by a network of European NGOs with the aim of making the EIB contribute to the EU development agenda to eradicate poverty, foster sustainable development and achieve the Millennium Development Goals. This fact sheet is part of the campaign’s toolkit.

A bank too big to fail to deliver for Europe? One of the less headline-grabbing but nonetheless remarkable phenomena to have issued from the meltdown of global capitalism since autumn 2008 has been the emergence of the European Investment Bank (EIB). As they gathered in Luxembourg in June 2008 to celebrate 50 years of the EU’s house bank, European decision-makers and dignitaries could surely not have predicted that the EIB was just weeks away from being plunged into the limelight as European leaders scrambled to overcome the mammoth freezing over of capital flows across the European Union. Following the collapse of Lehman Brothers in September 2008, when the global financial system’s house of cards started to totter after years of a debt-led boom, in Europe immediate disaster was averted by an unseemly round of ‘beggar thy neighbour’ national level bailouts of exposed commercial banks. Despite some notable casualties, the panic measures largely paid off at least in the short-term – though few were left in any doubt that the contagion in the system ran deep, and that a severe downturn in the European economy, as in other global economies, was now just around the corner.

Enter “everyone’s” investment bank A string of top-level ‘crisis’ meetings involving European leaders began to take place with urgent frequency, and the communiques issuing forth from these meetings held few tangible crumbs of comfort save for

announcements that additional capital resources would be made available via the EIB for about-to-be cash-strapped European small- and medium-sized enterprises (SMEs). It is unclear exactly how great the corporate stampede around this time to the EIB’s Luxembourg headquarters was (notably, in November, Europe’s industry commisioner Günter Verheugen was publicly floating his preference for a EUR 40bn ‘soft loan’ figure from the EIB in order to rescue the EU’s leading carmakers), nonetheless civil society monitors of the EIB saw a sharp and rapid focusing of long-standing concerns related to the bank’s operations. While EU leaders were quick to talk up the scale of additional available EIB finance, considerations about the quality of EIB investments – not exactly a mainstream topic du jour even in the best of times – seemed not to be a top priority. In crisis times, being seen to act, and fast, with major headline sums – well, you can’t argue with that, right? However, in an article published in the European Voice in November 2008 (entitled “A better return for our money”), Counter Balance questioned some of the acute weaknesses in-built in the EIB’s lending structures for years – weaknesses that hamper the pursuit of verifiable quality investments, and which will only be exacerbated in the accelerated crisis mode currently prevailing at the bank. A wider issue pertaining to the ‘quality issue’ has also come to a head as a result of the economic crisis. 

European Investment Bank and the economic crisis

Critics of the EIB have often scratched their heads at Article 18, paragraph 1 of the EIB’s statue, which describes how the bank should lend money only when “funds are not available from other sources on reasonable terms”. It has been bemusing to consider how so many of the EIB’s major multi-national beneficiaries over the years have struggled to negotiate reasonable terms elsewhere, and, at the same time, concerning to contemplate which smaller, perhaps more cutting-edge or green technology-based, companies have failed to gain access to EIB funds as a result of this ‘crowding-out’.

Filip Kalkowski, 2005, Copyrights: CEE Bankwatch Network

Now, though, the crisis has imposed at least a temporary moratorium on this supposed statutory requirement. Public finance via the likes of the EIB is presently just about the only money in town, with few available alternatives. If major injections of capital resources into the EIB both to fend off and help get the EU through the crisis are not to result in a ‘free for all’ (see below for some evidence of this already), the onus has to be on the EIB to prove that its investments are of a suitable and measurable quality. European parliamentarians should also be working to enforce greater accountability at the EU’s house bank in this its supposedly ‘finest hour’, a time when Europe is facing its arguably biggest crisis since the end of the second world war.

The EIB’s answers to the crisis By December 2008, the EIB was detailing its crisis response package, providing some much needed numbers and priorities.¹ Total EIB investments in both 2009 and 2010 are to rise by 30 percent: both years should see total EIB lending volumes hit approximately EUR 72 billion. The economic crisis thus sees the EIB further entrenching its position as the biggest public lending organisation in the world in terms of volume, and the public signals from 

the bank are suggesting that it is already on course to exceed these new targets. The earmarked priorities for the EIB on this crisis footing are threefold: 1. European SMEs and “mid-cap” companies (extra EUR 3.5bn in both 2009 and 2010) 2. An energy and climate change package, including the automotive industry; the latter industry along with other transport industries are to be covered by the “Clean transport facility” (extra EUR 6bn in both 2009 and 2010) 3. Central and eastern europe countries are to benefit from increased convergence lending (extra EUR 2.5bn in both 2009 and 2010)

¹ “EIB Directors approve anti-crisis measures for 2009-2010”, see: http://www.eib.org/about/press/2008/2008-159-eib-directors-approve-anticrisis-measures-for-2009-2010.htm

European Investment Bank and the economic crisis

In May 2009, the EIB also announced an expansion of its lending for infrastructure and the banking sector in Africa. It did so in tandem with other international public lenders such as the World Bank and the African Development Bank as they set out a USD 15 billion response to the financial crisis in Africa.²

Billions of euros begging many questions European car industry a clear crisis ‘winner’ Heralding, in characteristic soundbite fashion, an end to “financial engineering and more real engineering” in the British economy, Britain’s business minister Peter Mandelson announced to the UK parliament in January 2009 that the UK government would “unlock loans of up to GBP 1.3 billion from the EIB” primarily for the UK’s car industry. Mandelson was at pains to make the point that this was no industry ‘bail-out’. The bail-out tag has, though, been hard to shake off for this high profile element in the EIB’s crisis lending, and moreover it has failed to defuse suspicions that an unhealthy dimension of financial engineering is in fact at play in the EIB’s response.

Given the high profile nature of these loans, these carmakers should be held accountable and deliver on their promises to green their fleets. If they do not the EIB loans should be recalled. Questioned extensively by journalists at the EIB’s annual press conference in March 2009 about these car loans, the EIB president Philippe Maystadt stressed that EUR 400m per year is the limit for each company under the new lending facility – for now this remains one of the few certainties governing the EIB’s relationship with Europe’s beleaguered car sector.

Show us the SME money Details available publicly on the internet regarding to whom and for what the EIB provides lending have long been thin on the ground. The given moment at which the EIB even deigns to reveal project details is incumbent on the wishes of the project promoter – as a result a project may not appear on the online project pipeline until after an EIB board decision has taken place. If you open at random a project description page on the website of the European Bank for Copyright © European Investment Bank

The EIB has defended its aggressive new support for EU carmakers such as Daimler, BMW, Volvo and Renault by insisting that it is merely assisting them in reaching their EU CO2 emissions reductions targets. Not only is the European car industry estimated to be operating at 20 percent over-capacity, the same major companies have spent more than the last ten years lobbying – rather effectively – against falling into line with meeting the CO2 targets. The conclusion drawn by environment groups is that a huge amount of EIB funds – approaching EUR 7bn for the first six months of 2009 – has been swallowed by an industry for environmental measures that it should anyway have been embarking on as per EU legislation.

The EIB’s president Philippe Maystadt and senior executives of BNP Paribas Fortis seal a EUR 150m EIB loan for Belgian SMEs in July 2009. The EIB’s central role in trying to stimulate Europe’s smaller businesses has never been clearer. Exactly which businesses will benefit remains far from clear.

² “IFIs cooperate to provide US$15 Billion to Respond to Financial Crisis in Africa”, see: http://www.eib.org/about/press/2009/2009-079-at-leastan-additional-ususd15-billion-to-respond-to-financial-crisis-in-africa.htm



European Investment Bank and the economic crisis

Reconstruction and Development (EBRD), and then do the same on the EIB’s website, it’s not unlike comparing – respectively – a work of Tolstoy with a Japanese haiku. From time to time, when NGOs successfully raise the profile of a particularly controversial EIB project in line for funding, this may result in a fuller EIB justification of the project. Yet, in the main an EIB project description is almost guaranteed to be ‘economic with the réalité’. Matters take an unfortunate turn for the worse when applied to the EIB’s lending for SMEs. This important plank of the bank’s lending – even before the crisis accounting for upwards of 20 percent of overall EIB lending – involves billions of euros being channelled to EU enterprises via commercial banks. Through these credit lines, the EIB finances up to 100 percent of the total costs of projects that are usually implemented by SMEs (with fewer than 250 employees)

Attempts by Philippe Maystadt to champion this breakthrough in transparency norms at the EIB press conference in March 2009 were met lukewarmly – if not with outright bemusement – by European journalists. This was principally because the “EIB - private bank - SME” dynamic had moved on significantly in light of the economic crisis. Aren’t EIB intermediary banks, the majority of whom sit prominently on European high streets, potentially hoarding any money they can get their hands on (including from the EIB) in order to shore up their crisis-devastated balance sheets? The intended beneficiaries, and the lifeblood of the economy, the SMEs, could potentially be enduring further misery as a result, even as the EIB churns out more billions supposedly at their behest.

A properly transparent regime of on-lending to SMEs would be able to throw a lot more light on such speculations. Unfortunately, the EIB’s Previously going under the seemingly benign current SME-lending regime is unable to but technocratic-sounding terminology of dispel these suspicions. Even if it is able to ‘global loans’, information on where this type track and receive input back on where and of lending ends up has tended to require more for what its loans to SMEs are going, it is not of a leap of faith than anything that could be obliged to provide rigorous feedback. Nor are described as concrete evidence of accountable its prescriptions on what kinds of projects will use of taxpayer-backed finance.³ be funded especially loaded towards sustainable, climate-friendly areas. The EIB’s The crisis-driven emphasis on lending to SMEs guidelines state that the private banks “will be by the EIB appeared to have brought about responsible for evaluating each loan application a shift in the bank’s attitude towards the submitted by a SME. For most operations, transparency issue that has dogged this branch it will be entirely up to the intermediary bank of its lending for some years. In what was being to decide whether or not to grant a loan hyped as a major breakthrough and concession to the SME.”4 to ‘more openness’, autumn 2008 found the EIB boasting that receiver SMEs would, in a break This last stipulation, granting the private banks from the past, be made aware explicitly that any such discretion, may in fact be precisely the EIB money being on-lended to them by private point at which billions of European public banks was, indeed, derived from the EU’s house money is most at risk. bank. Furthermore, the risks attached to these investments are now to be shared between Indeed, the frailties in ‘value-added’ that this the intermediary banks (which previously bore system – especially in the crisis setting – them in full) and the EIB. exhibits have now moved beyond the realm of informed theory and experience.5 In Ireland, 3 For one such example of the uncertainties surrounding the EIB’s global loans, see the Bankwatch study (2005)

“Positives undermined: the EIB’s lending for renewable energies”, available at: http://www.bankwatch.org/publications/studies.shtml?x=260163



4 EIB launches new loans for SMEs, October 2008, see: http://www.eib.org/about/news/eib-loan-for-smes.htm 5 “A better return for our money”, European Voice, November 14, 2008; see: http://www.europeanvoice.com/article/2008/11/a-better-re-

turn-for-our-money-/63087.aspx

European Investment Bank and the economic crisis

recent media attention discusses government-level misgivings about “the hows”, “the whats” and “the how much” attached to EUR 350m of EIB lending for SMEs. Ian Talbot, chief executive of Ireland’s largest business organisation Chambers Ireland, has commented: “We don’t know the number of loans given under the EIB funding, but we haven’t got a sense that a lot is flooding out the door”.6

The crisis may well be exposing the shortcomings of a lending model that has revelled in obscurity for far too long.

The end of the line for PPPs (if the EU wants major investment projects to add value) It is difficult to say if it was a calculated attempt to bury unsuitable news, but as Wall Street was imploding in September 2008, the launch of the European PPP Expertise Centre was announced by the EIB, under whose roof the new centre is based.

The onus is clearly on the EIB to account for these kinds of loans that are steadily accumulating and going out the door, primarily for now to Europe’s private banks – those same banks that are beginning to register improved Due to numerous high profile scandals, profit figures. infrastructure and building projects such as new hospitals, bridges and metro lines Notably, and encouragingly, MEPs have involving PPP (public-private partnerships) expressed how alive they are to the problem. have become notorious in the home of their In the parliament’s Economic and monetary birth, the UK. Despite the formalistic affairs committee’s annual report into the EIB’s abbreviation, PPP has still managed to mark activities (for the first time in 2009 also itself on the consciousness of the British public including an assessment of the EBRD’s as forcibly as the sign of the devil – 666. activities) it is emphatically noted that: The pro-PPP thinking at European level had “MEPs urge the EIB to better monitor and to make undoubtedly been long in the pipeline. Yet along transparent the nature and final destination of its came the crisis, and there was deemed to be no global loans in support of SMEs.” need to turn back. Or rather, turning back was simply out of the question. A wider concern has also been voiced by a member of the UK parliament, Kate Hoey. As part of the response to the economic Writing in The Guardian in June 2009, crisis and cross-European downturn it emerged Hoey observed: that the European Commission was asking the EIB to accelerate its support for large “Structurally, high street banks are now badly infrastructure (specifically for the designed to help small and medium-sized Trans-European Transport Network) and the businesses – they are not locally based; they don’t implementation of its Loan Guarantee know their customers; they have computer Instrument for TEN-T – the latter has long been systems which calculate lending on banks’ terms. aimed at promoting PPP projects. Even when the European Investment Bank contributed €30bn to help small business at the end of last year, commercial banks simply either refused or did not have the local knowledge to publicise or hand over this money.” 7

Yet if the highly non-transparent PPP investment model has been seen to be hugely controversial at the best of times, with the private sector regularly cashing in at the expense of taxpayers thanks to badly conceived,

6 ‘Banks lending very little of €350m EIB funds set aside for SMEs’, Irish Examiner, July 30, 2009; see: http://www.irishexaminer.com/sport/banks-

lending-very-little-of-350m-eib-funds-set-aside-for-smes-97588.html#ixzz0O53mY8ek

7 “A new people’s bank”, The Guardian, June 8, 2009, see: http://www.guardian.co.uk/commentisfree/2009/jun/08/post-office-northern-rock



European Investment Bank and the economic crisis

overpriced infrastructure projects, in crisis times two overriding factors have come into play that undermine the claims made by PPP proponents:

Source: Tax Justice Network

1. There is, fundamentally, very little money available to allocate to private companies, and this situation is not expected to improve for severa years.8 2. According to the IMF, allocating any available stimulus money for private sector engagement in major investment projects has extremely limited stimulus impact – the private sector will pocket the money rather than passing it on in any meaningful, beneficial ways to the wider economy. The IMF has emerged from the economic crisis with its reputation enhanced more than most other international financial bodies. It had warned well in advance of the ‘bubbles’ developing in central and eastern Europe as a result of the preferences for foreign currency-denominated mortage arrangements in many of the new member states. Most recently, in the intense negotiations surrounding Latvia’s troubled navigation through its current crisis predicament, the Financial Times details how, in the IMF’s view, “PPP has been perceived as a source of corruption in Latvia for years”.9 When it comes to PPP use (and abuse), the extent of this trend beyond Latvia is as yet far from certain – certainly the IMF seems keenly alert to the unfortunate potential abuses. Yet the seriousness that appears to be attached in the case of Latvia suggests that the European Commission and – by extension – the EIB should be treading extremely carefully in further encouraging PPP investments that involve European public money. As “Never mind the balance sheet”, Bankwatch’s recent study on PPPs,10 reminds, the need for thoroughgoing

Public pressure grows on tax haven user Royal Bank of Scotland in spring 2009

public debates on the topic are more necessary than ever. In the meantime, private ‘PPP industry’ sponsored, fee-paying conferences continue to take place across central and eastern Europe with startling regularity and often featuring speakers from the EIB and the EBRD.

EIB support for the ‘haves’ extends even to offshore havens Some of the murkier sides of the financial world have been stunningly exposed for their role in contributing to the financial and economic crises, none more so than tax havens. Already notorious and the subject of scrutiny from tax justice campaigners for many years, tax havens have been intergral to securitisation issues and an estimated USD 1,000 billion leaving developing countries in capital flight.

8 For discussion of this point, see: http://bankwatch.org/publications/mail.shtml?x=2172316#penny 9 “A quick turn of events in Latvia”, July 27, 2009, see: http://ftalphaville.ft.com/blog/2009/07/27/63936/a-quick-turn-of-events-in-latvia/



10

The report Never mind the balance sheet: The dangers posed by public-private partnerships in central and eastern Europe (November 2008) can be downloaded at: http://bankwatch.org/documents/never_mind_the_balance_sheet.pdf

European Investment Bank and the economic crisis

The political mood music on tax havens has fundamentally changed tone, with a wide range of the world’s leaders lining up to call for a clampdown in their use. The translation of admirable intentions into concrete action on tax havens has, however, left many commentators, politicians and the public feeling short-changed.

the EIB regarding the impacts of major project sponsors being registered in tax havens. The response was disappointing and largely hides behind the EIB’s public non-disclosure policy, under which the bank has refused to publish the results of its due diligence on the grounds of “protection of privacy and the integrity of the individual”.

The Counter Balance coalition’s engagement since 2006 in monitoring and campaigning on several major EIB-sponsored projects in Africa has made it aware that the EIB has been providing support to certain project promoters that appear to operate through financial vehicles registered in well-known tax havens.11 This is not only disconcerting in the first instance, it is actually scandalous when we consider that these same projects fall under the EIB’s ‘development lending’. How appropriate is it for European development money to be benefitting entities that take advantage of off-shore financial centres?

Not for the first time, the EIB’s dramatic lack of transparency prevents concerned citizens’ groups checking up on the due diligence procedures or the evidence that is used. It may have this procedural means to block proper scrutiny, but above all else it bears pointing out that the EIB is incapable of making a convincing case that its money is being well-used and in accordance with its policy on fraud and corruption.

Slowly but surely, more meaningful steps to crack down on offshore financial facilities have been taking place throughout the summer of 2009. MEPs should make use of this momentum to eradicate for good the Further research compiled in Counter question marks that loom large over the EU Balance’s recent report “Flying in the face of development” details how, in the last five years, house bank’s relationships and dealings with tax-phobic businesses. the EIB has loaned EUR 5.66 billion to the top tax haven users from the UK, France and the Where is the value in being Netherlands (namely several of these countries’ private banks) while EUR 210 million over-stretched, especially in times like these? has gone to African funds using tax havens in their strategies.12 To commemorate the fiftieth anniversary of the EIB in 2008, a team of European Even in the rare instances where the EIB does identify tax evasion practices being carried out economics academics this year published a history of the bank’s inception and activiby its clients, its sanctions are weak. There is no public announcement of companies that are ties to date. It provides a wealth of information excluded from finance, and no debarment from on some of the political tug-of-wars that have tendering for other EIB projects unless or until taken place down the years concerning what the EIB should be doing – and for whom – as a final criminal conviction has been achieved. This does little to discourage companies, and is well as some insights into what is undoubtedly a far weaker approach than that being taken by a fairly unique internal culture and institutional character. the World Bank and other similar institutions. Very little precise detail has been available up In March 2009, Counter Balance wrote to the till now on how the EIB views internal staffing EIB’s president Philippe Maystadt asking for clarification on the due diligence undertaken by issues. For sure, civil society critics have often 11 Details of the companies involved feature in this Counter Balance press release, available at: http://tinyurl.com/l6nktx 12 The report Flying in the face of development: How European Investment Bank loans enable tax havens (July 2009) can be downloaded at: http://

tinyurl.com/nf5ot3



European Investment Bank and the economic crisis

If the EIB is to invest for the benefit of the European Union, and for that of many other societies around the world, it needs to invest in its own people.

Beyond the big numbers

Staff

linked the EIB’s poor – even at times rather haphazard – environmental oversight with lack of internal staff resources. Contained in the history volume is strong evidence to characterise the EIB philosophy on staffing as one of ‘running a tight ship’. In fact, the growing disparity between increasing lending volumes over the last decades and marginally increasing staff levels (see the trend illustrated in the graph) is presented as a badge of pride. Serious questions about the limitations of this philosophy now have to be raised, especially when in crisis times, as the EIB’s president Philippe Maystadt has put it, the bank is being asked “to do more, to do it faster and to take more risk”. In short, the present lack of staff at the EIB is clearly untenable. Maystadt himself has publicly characterised the EIB as being 13 “over-stretched”. There can surely be no more important moment for the EIB to reverse its current staffing philosophy and to recruit more specialist staff, people specialising not only in risk assessment and management but also environmental and development specialists. Such has been the demonstrated lack of expertise in these fields over the last 20 years of civil society scrutiny of the bank’s operations that additional staff taken on in the crisis period should be maintained in the long run. 

However, major questions about its modus operandi persist, especially when so much of its crisis lending is contingent on kinds of lending products and methodologies that are vulnerable and on the general view of economic development that, as is becoming abundantly clear to so many people around the world, fired us into the present crisis. At the heart of the EIB’s statute is language related to the bank’s central contribution to the “balanced economic development” of the European Union. Major debate can be had about what this means and entails, but the bank’s bottom line – exacerbated by the crisis situation – is undoubtedly going to remain fixated on lending volumes. This, in turn, will speak volumes about its inability to prove its deeper ‘added value’. MEPs should not be in awe of the EIB’s big numbers but instead be resolute in asking where this money is going, and who exactly benefits from it. The campaign “Counter Balance – Challenging the European Investment Bank” is promoted by: CEE Bankwatch Network (Central and Eastern Europe) Both ENDS (Netherlands) Bretton Woods Project (UK) Campagna per la Riforma della Banca Mondiale (Italy) Les Amis de la Terre (France) urgewald (Germany) Weed (Germany) Contact: Email: [email protected] www.counterbalance-eib.org Brussels, August 2009

13 Comments made at the EIB’s annual press conference, Brussels, March 2009

This document has been produced with the financial assistance of the European Union. The contents of this document are the sole responsibility of CEE Bankwatch Network and can under no circumstances be regarded as reflecting the position of the European Union.

Signed loans

EIB staff numbers increasing more slowly than lending amounts (graph reproduced from the academic history “The Bank of the European Union. The EIB, 1958-2008”)

Asked to step up its lending volumes in a big new way in order to help the EU and other continents find ways out of the economic crisis, the EIB has clearly passed the first test: it has additional billions at its disposal, and it is moving them.