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Economics

Europe Needs Its Own Development Bank

Nov 22, 2019 Erik Berglöf

The European Union needs a development bank so that it can strengthen its capacity to respond to global and regional challenges – above all, to risks and opportunities in Africa. At a time of increasing uncertainty, growing international threats, and fundamental challenges to multilateralism, solid institutions are needed more than ever.

LONDON – Europe needs a robust and agile development bank that can cooperate with, but also challenge, the Chinese institutions involved in the Belt and Road Initiative and the United States’ newly reinforced development agencies. With this goal in mind, the European Union recently appointed a “wise persons group” (WPG) to review the European Union’s development-finance architecture. The group, of which I was a member, has devised three stylized options. But there might be a fourth alternative that combines the best features of existing institutions.

The EU needs a development bank so that it can strengthen its capacity to respond to big global and regional challenges – above all, to risks and opportunities in Africa. From a geopolitical standpoint, Europe urgently needs to bolster its economic sovereignty, without abandoning its ambition to forge multilateral coalitions. Development finance is a critical building block in that regard, and, although Europe currently provides close to two-thirds of all global development finance, it would have a much greater impact if EU efforts were better coordinated.

The two existing European development-finance institutions – the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) – each have their strengths. The EBRD is a proper development bank with a broad range of activities, close policy dialogue with national governments, and a heavy presence on the ground. The EIB, meanwhile, is mainly EU-focused: it is a policy-taker, and most of its staff are based in Luxembourg. But both banks are weak where development needs are greatest: in fragile states and particularly in Sub-Saharan Africa.

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0 Comments on this paragraph, 2 Comments on this article

San Bilal Nov 26, 2019

The Wise Person Group (WPG) most useful contribution has been to focus the minds of European policy makers on the needs to rationalise the EU financial architecture for development, making it more effective and impactful, and better aligned to European interests and values. See my take here: https://ecdpm.org/talking-points/european-development-financing-system-call-for-urgent-action/

But the 4th option now proposed by Erik Berglöf does not seem to add any real new element. He calls for “an open European development-finance system within which national, regional, and global institutions compete to implement EU assistance projects under a coherent European development policy”. The good news is that it already exists, so nothing new here. It is the European Fund for Sustainable Development (EFSD), which the European Commission and Council now propose to enhanced significantly under the new EU multiannual financial framework (i.e. EU budget for 2021-2027). The WPG failed to address the potential synergy and complementarity, but also overlap between the EFSD+ and a European Development Bank. Erik Berglöf sheds no light on the issue either. As for his call in his 4th option “to recast the EBRD as the European Sustainable Development Bank”, we are back to option 1, his preferred option as proposed by the Wise Person Group he belongs to, having simply omitted for some mysterious reason the focus on climate change, which also needs to be tackled outside the EU borders (the WPG calls for a European Climate and Sustainable Development Bank).

The functions and form of a European development bank deserve serious considerations, as discussed by the European Ministers of development on the 25th of November. The WPG report and insights by Erik Berglöf are most useful in that respect. But it should not hide the need to enhance coordination and cooperation among the various development finance actors, at bilateral, regional, multilateral and EU level.
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j. von Hettlingen Nov 24, 2019

Erik Berglöf believes Europe needs its own development bank, although it has already two development-finance institutions – the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB). The new institution aims to “strengthen its capacity to respond to big global and regional challenges – above all, to risks and opportunities in Africa.” In recent years European leaders have been looking into helping people in Africa prosper in an effort to stem migration.
The EBRD is a bank set up in 1991 to help Central and Eastern Europe, aiding countries that became independent after the fall of the Soviet Union to transition into democracies and develop free-market economies. Its members include all EU countries, which provided just over half of the start-up capital, the OECD, the Central and East European countries, the US and Japan. Based in London, the EBRD invests mainly in private banks and businesses, including both new ventures and existing companies.
The EIB, the lending arm of the EU is based in Luxembourg that grants loans, guarantees, and provides technical assistance and venture capital for business projects that are expected to further EU policy objectives. A bank owned by and representing the interests of the EU Member States, it works closely with other EU institutions to implement EU policy. While 90% of EIB lending occurs within the EU, 10% occurs in outside markets such as Southeast Europe and Iceland. It is the biggest multilateral financial institution in the world and one of the largest providers of climate finance.
The author says that “both banks are weak where development needs are greatest: in fragile states and particularly in Sub-Saharan Africa. In short, the European development-finance system needs an overhaul.” He advises against “maintaining the status quo,” because in the absence of change or reforms, Europe will not be able to gain greater influence, boosting “its credibility and capacity as a global player over the long term.”
The EU has recently appointed a “wise persons group” (WPG) to review its development-finance architecture, and the WPG – which included the author – proposes three options:
One is “to establish a new bank from scratch with the EBRD, EIB, and the European Commission as shareholders. But this would require huge investments of financial capital as well as specialized staff, and it would take time – which is particularly precious if we are to achieve the United Nations Sustainable Development Goals by 2030. For those reasons, EU finance ministers have already rejected this scenario.”
The other “two remaining possibilities are to build the new bank from either the EBRD or the EIB, with the WPG clearly preferring the former option. Unfortunately, after Brexit, the EU will control only a little over 50% of the votes in the EBRD, whereas many important decisions require larger majorities. And if Europe were to provide more capital, there are no guarantees that non-EU shareholders would agree to reduce their voting shares.”
Both options require structural changes. Brexit would have an impact on the future of the EBRD. And in light of the challenges of turning the “EIB or its subsidiary into a development institution,” the author has his own foruth option, that would involve the welding together of “the different parts of the system in an interesting and perhaps more politically palatable way – including by involving national development institutions more.”
No doubt a closer alliance between EIB and EBRD – Europe’s two main development institutions could have the potential to rival China’s “Belt and Road” infrastructure project. Obviously it is important to take a look at the criticisms directed at the EIB and the EBRD and learn from past mistakes. It is also imperative to separate the activities of the two banks and integrate them in a new one, while avoiding overlaps.
As the EBRD is losing its relevance, the author proposes its recast as “the European Sustainable Development Bank,” focusing on European development finance and “working alongside institutions such as the World Bank and the African Development Bank.” He says “at a time of increasing uncertainty, growing international threats, and fundamental challenges to multilateralism, we need solid institutions more than ever.”
However, Italy, Luxemburg, and Sweden have questioned the need for a new institution to fund development projects outside the EU. Europe is the largest provider of development aid but China is casting a shadow in certain regions, including Africa, by extending loans for infrastructural projects with no strings attached - a good human rights record. Perhaps the EU sees a niche there, because China has been accused of advancing debt-trap diplomacy that extracts concessions from countries that can not repay their loans. Nevertheless it will be a very expensive project. Can Europe afford it?
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