EIB’s €5 billion budget cut will hit Arab Spring countries hardest

EIB building.jpg

The European Investment Bank says that a €5 billion cut in the EU Guarantee Fund insuring its external lending, will force an equal cut of 15% in its funding pool for the 2014-2020 budget that will hit ‘neighbourhood’ states such as Egypt and Syria hardest.

The fund covers against defaults on loans and loan guarantees granted to non-EU member states.

While a third of the bank’s external lending goes to pre-EU accession countries, one half of the EIB’s €30 billion of lending funds is spent on countries in the European Neighbourhood Policy (ENP) area. The rest is divided between Asia, Latin America and South Africa.

“There is a high concern in the bank,” Alessandro Carano, the head of the EIB’s institutional strategy department told EURACTIV. “We need to maintain an engagement with our closest neighbours to support external EU policies – we cannot withdraw or send the wrong signal – but on the other hand, our investment requires a relatively stable environment.”

“With the situation in Syria and Egypt, this is contingent,” he added. “We don’t know what will happen from now until 2020. The situation in North Africa is worrying as there is very significant lending there that we cannot finance unless the situation is stabilized.”

Speaking yesterday (28 August) at a meeting of the European Parliament's Development Committee, Carano said the possibility that spending cuts would impact on several countries was “very high”.

Such EIB spending is typically undertaken in the form of private sector loans, rather than government aid.

Over the 2007-2013 period, EIB figures show that it provided some €13.5 billion to ENP countries, and €9.7 billion of that went to North African states fringing the Mediterranean, from Morocco to Syria. 

The EIB believes that such states will be hardest hits by the cuts in absolute terms, although higher percentages will be cut from the lending budgets to Latin America (26%) and South Africa (36%).

The EU’s lending to sub-Saharan Africa is covered under the Cotonou agreement with the African, Caribbean, and Pacific Group of States (ACP).

Tricky question

Speaking at the same Development Committee meeting yesterday, a European Commission spokesman said that the guarantee fund's liquidity was “a tricky question” that had to be resolved on a case by case basis.

But “we encourage more funding under the EIB’s own risk where possible,” he told the committee, adding that other funding measures could conceivably be used to address shortfalls.

Surprisingly perhaps, many development campaigners question the quality of bank lending arrangements already in existence, rather than call for more EIB lending per se. 

The EIB's use of offshore private equity funds as financial intermediaries is a particular bone of contention, although the EIB stresses that it will observe any internationally-agreed black list of offshore financial centres.

One NGO, Counterbalance, argues that such intermediaries should mostly be boycotted for their lack of transparency, lack of commitment to eradicating poverty, and their prioritisation of high returns over redistributive concerns.

EIB lending under the spotlight

The EIB is currently under intense pressure to publish a secret report into the tax affairs and pollution record of one offshore-based commodity giant, Glencore Xstrata, which it lent €48 million to in 2005.

The project was supposed to reduce sulphur dioxide pollution from a Zambian copper mine but Christian Aid recently filed an official complaint for disclosure of the bank’s report, amid claims of company tax avoidance, environmental calamity, and violations of labour rights.

In the European parliament yesterday, the chair of the development committee, Eva Joly, raised questions about the sustainability of another EIB-sponsored project in Brazil, to build the world’s third largest dam.

“On a recent tour of Brazil, we saw harmful effects on the environment and on the local population,” Joly said, adding that she had been told the EIB provided a €500 million loan which had helped the project, via a Brazilian development bank.

Carano confirmed the loan’s existence but said that he did not believe that it had been disbursed yet, because of issues related to procurement.

“We are very prudent on this,” he added.

The EU Guarantee Fund for External Actions was established in 1994 to cover defaults on loans and loan guarantees granted to non-Member States or for projects in non-Member States. The Fund was intended to:

  • Provide a 'liquidity cushion' in order to avoid calling on the Community budget every time a default or late payment on a guaranteed loan arises
  • Create an instrument of budgetary discipline by laying down a fiscal framework to govern EU loan guarantees to non-member countries.

The Fund is paid out of the general EU budget and has to be maintained at a certain percentage of the outstanding amount of the loans and loan guarantees covered by the Fund. At the end of 2006, the amount covered by the Fund was about €11 billion, and its assets stood at about €1.1 billion.

European Union

Financial Institutions


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