Europe needs its “own open development bank” to push its global agenda

Everyone needs a bank these days. That too in this digital era where people are questioning the role banks will play in future.

In this piece. Eric Berglof of EBRD argues for a development bank to push Europe’s global agenda:

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.

Europe has two development banks -EBRD and EIB:

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.

A better approach is to coordinate tasks of various development initiatives operating at a national level.

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.

Another attempt to increase white man’s burden?

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