As it begins to dawn on Europe’s elite that fiscal austerity is not working after all, the European Investment Bank is once again the talk of the EU as decision-makers scramble to stimulate national economies that are hemhorraging jobs and living standards – and hope – across the continent.
Greig Aitken, Bankwatch Mail editor in chief | 11 May 2012
(This post is an article from the upcoming Issue 52 of our quarterly newsletter Bankwatch Mail.
To receive Bankwatch Mail via email, subscribe to our mailing list here.
A EUR 10 billion capital boost for the EIB, that could see resulting investments of five times that sum, is the current clamour across Europe, though at the time of going to press little detail has emerged as to how to make this cash injection work in practice.
Big numbers and not enough details is something of an EIB hallmark. Josef Stalin, whose mantra was that “Quantity has a quality all of its own”, may well have been an admirer of the EU’s bank if he’d been around to witness its operations and reporting on such – thankfully quality versus quantity concerns related to the EIB’s investments and performance are beginning to register at the European parliament. But if EU finance ministers are intent on signing off on this capital increase for the EIB at the bank’s annual meeting in Brussels on May 15 (and perhaps Stalinist measures will be required to persuade austerity-philes such as the UK’s George Osborne to sign up to increased EIB capital), the ‘quality of EIB investment’ issue has to be addressed, rather urgently. The European Commission’s chief Jose Manuel Barroso may now be talking about ‘targeted investments’ via the EIB to ensure growth, but we have been here before.
Following the outbreak of the current crisis of capitalism in autumn 2008, the EIB was quickly given a ramped up investment role by EU decision-makers. An additional EUR 3.5 billion in both 2009 and 2010 for EIB investments to support European SMEs and “mid-cap” companies was mandated, with the lending to take place via on-lending from private banks. A “Clean transport facility”, aimed primarily at the European automotive industry, also included an extra EUR 6 billion worth of support in both 2009 and 2010 via the EIB. An extra EUR 2.5 billion in both 2009 and 2010 was also mandated via the EIB to benefit central and eastern European countries.
How this additional EIB crisis lending has worked out is open to question, although without it – its proponents argue rather tendentiously – things may be a lot worse than they are now. On vital SME lending provided by private banks via initial EIB funding, very little is known about how the EIB financing has benefitted the European economy generally. With next to no information on specific beneficiaries – and what they have done – available, the EIB nonetheless notes that 105,000 SMEs received its support in 2009 and another 115,000 in 2010. It also provided some EUR 13 billion of finance to 120,000 SMEs in 2011.
Bankwatch’s research (pdf) has shown meanwhile that EIB crisis loans to SMEs were more helpful to the commercial banks disbursing them than to the cash-strapped SMEs they were supposed to help. Bankwatch found that the EIB’s ‘global loans’, designed to benefit SMEs via lending from commercial banks, had a very poor penetration rate of 0.001 percent of all SMEs in the central and eastern European countries that were surveyed.
Any increased EIB investment potential, therefore, should not be directed willy-nilly at the SME sector given the problematic ‘intermediated finance’ model that the bank continues to insist on for this sector. The European private banking sector has just recently had a massive, temporary bailout known as LTRO (the long term refinancing operation), and it has had limited results despite its scale. EUR 489 billion flooded out of the European Central Bank in December 2011, yet bank lending to the real economy is still in negative territory.
These underlying issues have been acknowledged by a European Parliament report on the EIB’s own Annual Report for 2010. The rapporteur for this report, Bulgarian MEP Ilana Ivanova, told Bankwatch Mail: “We need clear performance indicators such as penetration rate but also target values for these indicators which could be used for assessment of the activities. I would like to stress that the SME support programs should be based upon explicit intervention logic and should be linked to expected results and impacts. It is clear that the final result could not be assessed when we do not have any explicit targets.”
As a further indication of how serious the gaps in the EIB’s support for SMEs are being viewed, Ivanova also revealed that: “The European Court of Auditors prepared a Special report on the SME guarantee facility which is managed by the EIB group. Within this report there have been identified weaknesses which are valid not only for this concrete program but for most of the Bank’s support programs for SMEs. I believe that we should continue our efforts and push the EIB to improve further on these points.”
In terms of the transparency of such investments, Ivanova was also clear: “A lot has been done by the EIB these last years for improving transparency in the intermediated loans for SMEs. However, in my view, there are still points to be improved in order to achieve better accountability to the European citizens.”
Accountability generally to European citizens, and awareness of environmental considerations, needs to be paramount if major infrastructure projects are to be part of any EIB sponsored growth package. A new ‘EIB rush’ may be upon us, but it is essential that new finance projects are based on needs assessments, especially in those countries and regions of Europe where the needs are greatest.
A thorough assessment of needs that considers not only climate and environmental limits but also the optimal options for satisfying these needs has to take place. Mere energy and transport growth should not be regarded as unlimited in the current scenario – needs should be assessed locally, country by country (with emphasis on the most needy countries) in order to identify the best way for the EIB to help fight the crisis and create jobs.
Following her study of all things EIB, Ilana Ivanova maintains: “I believe that in these times of austerity measures we need to reallocate and to concentrate money where its added value is the highest. In this regard the EIB should establish a clear link between inputs and outputs. We need clear objectives not only in terms of quantity but also in terms of quality in order to assess the efficiency and the effectiveness of the different programs. Therefore, I believe the bank needs to be lending better taking into account specific and measurable objectives.”
A factsheet on the EIB and the economic crisis is available at the Counter Balance website.
Never miss an update
We expose the risks of international public finance and bring critical updates from the ground – straight to your inbox.
Theme: Social & economic impacts
Tags: EIB | austerity | credit crunch | euro crisis | eurozone