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The EIB should be Europe’s development hub — for now

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By Jon Hay
08 Oct 2019

European politicians may be tempted to make a show by founding a new development bank. That would be a mistake. Results are what matter, not branding. To supercharge development and climate finance, the EU should choose the simplest and fastest option.

It is easy to mock the European Union, and names like ‘High Level Group of Wise Persons on the European Financial Architecture for Development’ are a gift to satirists.

But anyone who reads the report of the nine experts is likely to be impressed. The report exhibits all the virtues the EU so often practises, yet receives so little credit for: it is pragmatic, technically masterful, and balances policy ambition with careful analysis. And it manages to be quite brief: the main text is only 34 pages.

The problem the Wise Persons are gnawing on is how to optimise the aid and development finance Europe provides to poorer countries outside the Union.

It would be far easier for the EU to do nothing. It is not doing too badly at the moment.

Europe, including the EU organs and member states, provides about 57% of all the world's official development aid, well over twice as much as the US. This was €74bn of disbursements in 2017.

But the EU wants to do better, for at least four reasons. First, the urgency of climate change is now widely acknowledged. It will require huge investment, both to reduce greenhouse gas emissions and to fit society for the inevitable severe effects on the weather, which will alter every area of life, above all food supplies.

Second, the EU has agreed to the UN Sustainable Development Goals, which are meant to produce a rapid improvement in global living standards by 2030. The reality on the ground in poorer countries is of course far from rosy.

Third, poverty and instability in Africa — which the EU is particularly conscious of — as well as the Middle East have directly weakened Europe’s own stability through migration across and around the Mediterranean. It is not an exaggeration to say the Syrian civil war and state failure in Libya contributed to causing Brexit. In the UK’s 2016 referendum campaign, Brexit supporters whipped up fear of immigration by harping on the EU’s apparent failure to stem migrant influxes.

Fourth, the EU is aware of the growing overseas influence of China, which has massively expanded its development financing, especially in Africa, and has a unifying narrative, the Belt and Road Initiative. The US is also ramping up its efforts by creating the International Development Finance Corp, to some extent to counter China's move.

Rightly or wrongly, the EU wants to earn more credit internationally for its outsized role in development aid, and to brand its activities more obviously.

Old architecture

The ‘architecture’ with which the EU is trying to address these priorities was, as the report says, built for 20th century needs.

The EU’s two main outlets for development finance are the 60 year old European Investment Bank and the European Bank for Reconstruction and Development, founded to finance the transition of post-Communist countries to market economies.

But this is less than half the picture. In 2018, new commitments outside the EU totalled €41.7bn. Two thirds of that came from national development finance institutions such as KfW and FMO; 18% was from the EIB and 16% from the EBRD.

The European Commission is a big supporter of development, through a variety of loans, grants and guarantees, usually acting through or in partnership with other organisations.

This architecture has of course matured and been regularly updated and improved. There are mechanisms to ensure the different organs co-operate.

The Commission is about to improve this co-ordination through something called the Neighbourhood, Development and International Cooperation Instrument (NDICI) — an effort to ensure proper political control of development work and a more streamlined structure.

But the whole architecture still looks more like a village of houses in different styles rather than a single, gleaming new edifice.

One EU voice

Forces inside the EU are therefore thinking of more radical moves to bulk up the EU’s development brawn and give more power to its elbow — above all, by forming a new, bulky, visible organisation that would act as a central voice and bank of expertise for development in the EU. Providing a more distinct mandate for operations outside the EU could prove helpful when dealing with critical stakeholders, especially those of a more nationalist bent.

This would almost certainly involve an attempt to sort out the differing and overlapping activities of the EIB and EBRD.

Africa is a priority for the EU, and both development banks are moving progressively into lending in sub-Saharan Africa. This overlap could prove wasteful, or even lead to contradictions. Neither organisation is necessarily ideally suited to the job.

So the idea has arisen, first reported by GlobalCapital in the spring, of forming a new European Climate and Sustainable Development Bank.

But how should this be done, when both the EIB and EBRD are already involved in this field?

Each of the two has strengths and weaknesses, which the Wise Persons’ report dispassionately sets out.

The EIB has strong, unified governance; a big balance sheet; technical expertise in areas such as climate finance; and can make very cheap loans. But operations outside the EU are not its primary focus, accounting for only 10% of its activity; its cheap loans can risk undercutting private sector investment; it does not engage in helping recipient countries formulate policy; and although it lends in 118 countries, it has fairly few staff outside the EU. 

The EBRD is a proper development bank, modelled on the World Bank and others. It has the full panoply of development finance expertise, including a strong emphasis on lending to the private sector, as well as providing equity finance; it has green finance expertise; and it has a strong base of overseas offices, which enable it to make smaller loans.

But the EBRD is smaller; it has limited experience of working in the much more fragile kinds of economies to be found in Africa; it is weaker in social sectors such as healthcare and education; and crucially, it is not an EU institution.

The EU controls 63% of votes — though this will fall to 54.5% after Brexit. But to make strategic decisions, a 66% supermajority is required.

The EBRD’s role is already contested. The central and east European countries it was set up to help have developed a long way — in cases such as Slovenia, overtaking in wealth some older members of the EU. Their needs are now more similar to those of west European countries.

Meanwhile, the US and Russia — both EBRD shareholders — have both diverged from EU priorities, making governance more difficult.

It is far from clear that the EBRD can or should depart far from its original mission of financing post-Communist countries, especially if this is to serve priorities of the European Union.

Three options

The Wise Persons therefore considered three options. The first is to turn the EBRD into the European Climate and Sustainable Development Bank. The EIB would cede its ex-EU activities to it.

Its mandate would become global, with an immediate focus on sub-Saharan Africa, and it would need to broaden its business model to do more lending to governments.

The second is to create a new ECSDB, with mixed ownership. Its shareholders could be EU nations, the EU itself, the EIB, the EBRD and possibly beneficiary countries.

This has the advantage that the project would start with a clean slate, and could be optimally designed without legacy issues. It would have its own capital and do its own borrowing in the bond markets.

The third option is to create the ECSDB as an offshoot of the EIB. The EIB would be a minority shareholder, with the Commission, member states and national development banks also having shares.

This is the least glamorous and eye-catching option — but this is the one the EU should choose.

Keep it simple

Reforming the EBRD is tempting, but the political struggles required to do that are prohibitive. Under President Putin, who shows no sign of fading away, Russia is not inclined to play along with the wishes of the EU, an organisation Putin keenly resents.

Donald Trump will not govern the US forever, but he could be there for five more years. His attitude to development aid and finance is strictly that it should serve US interests, defined very narrowly. He is also inimical to action on the climate.

The countries of central and eastern Europe would also be within their rights to object to “their” development bank being turned into something else.

The greenfield option is also superficially appealing, and in fact is probably the most likely outcome, because it could play well politically.

But the EU should resist the temptation. Setting up an international development bank is a long, slow business. All kinds of policies need to be drafted and approved by the many shareholders typically found in these institutions. The risk of political disagreements delaying things is high.

The needs, especially of climate change investment, are too urgent to wait for that. The EU should move fast to constitute the ECSDB as an outgrowth of the EIB, preferably one that could still use the EIB’s back office, central administrative functions such as human resources and IT, treasury and funding.

But it should have its own financing policies, governance and risk management — enabling it, above all, to depart from the EIB’s exceptionally risk-averse habits. The ECSDB should be used as a nucleus for development expertise across Europe.

In time, it could prove useful to calve it off as a completely separate organisation. But that decision should be taken at leisure, without hurry, and for pragmatic reasons, not for show.

What matters now is not power politics, but getting money moving.

By Jon Hay
08 Oct 2019