Europe needs its own development bank

The euro sign in front of the former headquarters of the European Central Bank (ECB) is reflected in a rain covered window during heavy rain in Frankfurt, Germany, November 20, 2017.  REUTERS/Kai Pfaffenbach - RC1F8AC74E00
Editor's note:

This article was originally published in Project Syndicate.

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.

In short, the European development-finance system needs an overhaul. Maintaining the status quo, even one enhanced by the short-term measures suggested by the WPG, will not help Europe build its credibility and capacity as a global player over the long term.

One option proposed by the WPG would be 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 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 percent 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.

The EIB option would involve spinning off the bank’s non-EU assets (about 10% of the total) to a new subsidiary entirely controlled by European entities. These could include the Commission and national development institutions such as Germany’s KfW or the Agence Française de Développement. The big, and possibly overwhelming, challenge is to turn the EIB or its subsidiary into a development institution, despite the absence of basic features such as an inclusive shareholder base or a deep local presence.

Fortunately, there is a fourth option that would weld together the different parts of the system in an interesting and perhaps more politically palatable way – including by involving national development institutions more. Many of these national entities cover important areas, such as health and education, and operate in parts of the world where the EBRD and EIB have little or no presence. They could be integrated into 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.

This option also would involve separating the activities of the EBRD and EIB. The two banks already run up against each other in many countries and sectors, and their current expansion plans would increase the overlap. The EIB could focus solely on EU countries, with its assets elsewhere transferred to the EBRD. Conversely, the EBRD could hand over its assets in the EU, and focus on the European neighborhood and Sub-Saharan Africa. Such an exchange would not be easy, but it was actually prepared once, in 2013.

The third and central component of this proposal would be to recast the EBRD as the European Sustainable Development Bank, working alongside institutions such as the World Bank and the African Development Bank.In order to increase its lending capacity, the EBRD would need additional capital. Because only EU shareholders are likely to contribute, their voting shares in the bank should increase. But non-EU shareholders, including the US, the UK, and, importantly, recipient countries, would still be represented, thus preserving a multilateral approach. The EIB, meanwhile, would focus on becoming the European climate bank, and would serve as a backstop to help strengthen national development-finance institutions.

Now is a good time to overhaul European development finance, in part because the EU currently is preparing its next seven-year budget. Equally important, the EBRD, an institution with a proven track record and additional lending capacity, faces important strategic choices over the coming months.

As Brexit looms, the EBRD’s non-EU shareholders will soon face a stark choice between reducing their respective stakes or witnessing the establishment of a new European institution in which neither they nor EBRD recipient countries hold shares. And without access to EU grants, the EBRD will not be viable in many of the sectors and countries in which it currently operates, and might eventually have to close down.

Instead of letting the EBRD flounder and fail, the EU and its international partners should put the bank at the heart of European development finance. At a time of increasing uncertainty, growing international threats, and fundamental challenges to multilateralism, we need solid institutions more than ever.