EIB in the spotlight, but not the answer to the eurozone’s woes

14 June 2012, European Voice

EIB prepares to take on a greater role.

The European Investment Bank should not be presented as the answer to all the eurozone’s problems, its president has insisted. Werner Hoyer – who has been at the helm of the EIB since 1 January – has outlined the risks involved in building up expectations that increasing the bank’s lending capacity could be a magic bullet.

However, in an interview with European Voice, he said that the Luxembourg-based lender had to get used to the limelight. “We have gone from one extreme to the other,” said Hoyer, a former deputy foreign minister in the German government.

“Complete neglect for decades – which for the bank itself is a comfortable position to be in, being left alone – to now being confronted with expectations that go far beyond the horizon. We can, with a high degree of reassurance, say we are able and ready to contribute to the solution process, but we are not the solution.”

The EIB was thrust out of its comfort zone in January when, at the end of a summit in Brussels, leaders of the European Union’s 27 member states called for it to be “strengthened” to “support growth” to the tune of €10 billion. The momentum was increased with the election as president of France of François Hollande, who has become the most vocal supporter for an increased role for the EIB.
Investments

The EIB invests in projects such as road infrastructure schemes, initiatives aimed at tackling climate change, and support programmes for small and medium-sized enterprises, with about 10% of loans going to countries outside the European Union. It borrows money on the capital markets rather than drawing on the EU budget.

An increase in capital, in line with the proposed extra €10bn , would, with leveraging, allow the EIB to lend an estimated €60bn over the next three years. Member states are expected to approve the move at the European Council later this month (27-28 June). “If the heads of state and government come to the conclusion that the EIB should play an enhanced or increased role in tackling the economic problems of Europe, then of course we are ready,” Hoyer said.

But there are dangers. More money would mean more projects to invest in and, perhaps, greater political interference with regard to which projects to back. “This is a serious problem, because it is not the case that every project submitted to us stands the stability test or the financial viability test,” Hoyer said. “The bank – not out of arrogance but out of necessity, to preserve its business model – must insist that it…has a right to say ‘No’ to projects.”

The EIB has been considered a careful investor in the past, reflected in its triple-A credit rating, and Hoyer insists that it should continue to invest only in projects that it considers beneficial. “The bank must preserve its business model,” he said. “It is a lifeline that we must not cut.” He said that this business model allowed it to borrow “incredible amounts of money” on private capital markets, €76bn last year, at very good rates.

The risk, he said, was that if doubts emerged about “our high and strong standing” on funding markets, and the bank’s ability to borrow decreased, “that would be a disaster for member states and for final recipients”. He added: “Our contribution to the European economy and to the real economy would be much lower.”
Transparency concerns

The EIB’s new-found attention means that more questions are being asked about its accountability and transparency. Bankwatch, which monitors international financing institutions, claims that the EIB “has a strong aversion to sharing information with the public”.

Hoyer said that transparency was high on his list of priorities. “I’m extremely sensitive to this issue,” he said. “I’m aware that the bank has moved into the public awareness only recently and I’ve promised myself to have a very close look at these things.”

He said that there were “limits to transparency”, but that, within those limits, “I have not found a bank or institution for which the regulation concerning compliance and transparency is clearer, better thought-through and better codified”. He added: “You can then come to the implementation of this…and I’m ready to learn, but what I’ve seen so far makes me quite happy.”

If member states do approve greater use of the EIB this month, accountability will become even more of an issue. In addition, Hoyer will have to ensure that the enhanced role does not endanger the EIB’s ability to raise money or dilute its effectiveness.