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The beauty contest is over: High time to reform the European financial architecture for development

21-06-2021

San Bilal, ECDPM commentary, 21 June 2021

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Last week, the Council of the European Union (EU) finally adopted long-awaited conclusions to set clear directions on how to enhance the European financial architecture for development (EFAD). Strengthening the EFAD is timely, given the devastating health and socio-economic effects of the COVID-19 pandemic, the high climate and environmental ambitions of the EU, and the need to mobilise more developmental resources for greater sustainable and more inclusive impact, in particular in poorer, more fragile and vulnerable countries.

While containing all the right words, the Council Conclusions fall short of the needed ambitions. More can and must be done to enhance European development finance in times of COVID-19.


A wrong focus on one single European development bank


EU member states’ reflections on the EFAD were initiated in June 2018 by a call from France and Germany to the Council to set up a Wise Person Group, notably with a view to reconsidering the respective roles of the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB).

The European Commission was mainly concerned about articulating European development finance for investment around the newly established External Investment Plan (EIP) and the European Fund for Sustainable Development (EFSD), as framed in its September 2018 Communication, and in the context of its new long-term 2021-2027 budget, with the EFSD+. In its October 2019 report, the Wise Person Group instead recommended setting up a European Climate and Sustainable Development Bank.

Despite the many other interesting recommendations, member states’ attention on the report mainly focused on who should act as the European development bank. The option to set up a brand new bank was immediately dismissed as too costly and long-winded. This left two other options, which are just as unrealistic in my view:

  • Turn the EBRD into the EU development bank and take over the EIB operations outside the EU – clearly the favoured option of most experts in the Wise Person Group, as recognised by its chair Thomas Wieser in our recent interview, though politically they were not allowed to say so.
  • Make an EIB subsidiary in charge of the EIB activities outside the EU, also taking over from the EBRD.

These two options led to a de facto beauty contest, at times pointlessly nasty, between the EBRD and the EIB, to find out which one could prevail over the other and win the trophy of becoming the European development bank.

Divided EU member states bought time by asking for a feasibility study to assess these two options, but also wisely asked for a third scenario to be considered – unwisely called ‘Status Quo+’. This scenario would be based on improving the current institutional setting, that is, including reflections on the synergies between the EBRD, the EIB, other European national development banks and financial institutions, and the EU budget and EFSD+.

The feasibility study, finalised in March 2021 and disappointingly still not made public, came to obvious conclusions: transferring assets from one bank to the other, between the EBRD and the EIB, would be extremely costly (no full estimates could be provided) and very time consuming (over ten years).

So, gone was the idea of a single European development bank… at last!

Instead, the ‘Status Quo+’ scenario could entail reforms to enhance cooperation and synergies of the European financial institutions for development, not least, but not only, the EIB and EBRD, which could also enhance their business model. Europe could then focus on what matters: the long-term COVID-19 recovery, collectively building back better and greener, in a more inclusive and gender-sensitive way.


Council Conclusions: Will the status quo prevail?


All EU member states have now endorsed the ‘Status Quo+’ scenario. But what does that mean in practice?

So far, most of the improvements of the EFAD have been initiated by the European Commission and endorsed by the member states. These include, among others:

In their Council Conclusions, member states stress the need for the EFAD to be more impactful towards reaching the Paris Agreement and the Sustainable Development Goals, based on EU values and strategic priorities. This need is compelled by increasing geopolitical and geo-economic competition (read: mainly China), where it will be key to capitalise on the diversity of European actors and instruments, and promote stronger cooperation and interactions, notably, but not only, between the EIB and EBRD.

They also emphasise the need for greater political guidance by the member states and policy steer and coordination by the European Commission, including better coordination of the European voice in multilateral development banks and fora.

This all sounds very good, but all these elements were already contained in the Council Conclusions of 5 December 2019. Much ado about nothing? The intensive discussions among member states and with the European Commission over the last few months and weeks do not seem to have amounted to much in last week’s conclusions.

Worse actually: they stress that reforms of the EFAD should be conducted at no additional costs for the member states, even though the EIB is asked to improve its business model for greater impact and increase its presence in the field, the EBRD could gradually expand into sub-Saharan Africa, and the Commission, European External Action Service (EEAS) and EU delegations should increase their capacity. Moreover, the Council Conclusions stipulate that coordination among European financial institutions for development should be done through existing mechanisms only. This sounds a lot like a status quo and leaves little space for the ‘plus’.


The time for significant practical reforms is now


Fortunately, the Council Conclusions do not close too many doors.

The Commission can take a lead in providing avenues to improve the strategic coordination of the EFAD and provide incentives for greater cooperation, coherence and impact. Member states must step up their engagement in the EFAD, to ensure that this includes development coordination beyond the EU budget.

The Team Europe approach, still very much in its infancy and operating in an ad hoc manner, could be more formally structured, both within the EU and towards partner countries and actors, and be more inclusive. It could also help facilitate cooperation among a subset of EU member states and their financial institutions, even without EU financing.

Proposals for more cooperation, co-financing, risk sharing, syndication and mutual reliance, as well as for support to the origination of transformative and locally-owned pipelines of projects, could be pushed through.

The good news is that financial institutions seem eager to be more involved at the strategic and implementation levels, and ready to up their game. This includes for instance the likely restructuring of the EIB for its operations outside the EU (to become more impactful), the likely expansion of the EBRD into sub-Saharan Africa, and new modalities for coordination and cooperation, including by the Association of European Development Finance Institutions (EDFI) and the newly established ‘Enhanced Partnership’, regrouping European national development banks (from France, Germany, Italy and Spain).

As called for by EBRD Vice-President Pierre Heilbronn in our recent discussion, shareholders of financial institutions for development should provide stronger political guidance and be more demanding of the institutions they control.

It is high time to come up with significant concrete reform proposals and actions, to be reported back to the Council by November 2021.


The views are those of the author and not necessarily those of ECDPM.

Photo courtesy of Markus Spiske via Unsplash.


Our series on the European financial architecture for development


In 30-minute interviews with key stakeholders from the European bilateral and multilateral development banks, the European Commission and development finance experts, co-hosts Mikaela Gavas (CGD) and San Bilal (ECDPM) take you on a thought-provoking journey as they explore efforts to maximise the potential of European development finance and get to grips with how to devise a more collaborative system.

Follow our CGD-ECDPM ‘EFAD Talks’ for the views of some of the key stakeholders.

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Comments

Klaus Rudischhauser

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2021-06-26 05:45:33

Dear San Bilal, thank you very much for your clear comments on what I think is a very important issue for the European Union. However your careful wording does not adequately reflect, how big the damage is that has been done by the unwillingness of the Council to take a strategic decision. There was a historic chance here to equip the European Union with a tool, that is bitterly missing in its external action. Let me just point out three basic reasons why all the arguments that have been put forward by the wise persons group and the feasibility study of the Commission are not addressing the real issue: 1. The EBRD is not and cannot be the European Bank. The EU participates in it with good results and that is it. 2. The EIB is THE European Bank, but could do better when it comes to development. 3. The European Union is the only relevant donor in the world, that does not have its own development bank. Therefore, the only politically relevant decision would have been to argue in favour of transforming the EIB into a real European Development Bank that would match the importance of the EUs external policy and support it with proper instruments to make its global action more efficient and powerful. The nice words of the Council, as you put it, are just disguising the real issues. And you are right: it didn't need a wise persons group and a feasibility study to confirm weaknesses of the status quo and the reforms which are requested could have been imposed long ago, if the Council had used its powers. Let me expand briefly on the three points above: 1. The shareholder structure of the EBRD excludes that it could be the EU's bank. The feasibility study makes that very clear. This not to say that the EBRD does not do good work! On the contrary, it is a very useful instrument for the EU, but not more. The problem here is that the Council conclusions authorise it to expand into LDC's and Africa, creating an unhealthy competition with EIB using the EU's own money and playing into the hands of the other shareholders! How cynical can the Council be? 2. The EIB is the only institution that can be the EU's bank. The EU has all the powers to force it to do the necessary reforms and no one else has this. Whether the future EU development bank will be inside the EIB or a new creation of one part of the EIB with other shareholders (ideally the other development banks inside the EU), is a technical decision. But to ask the EIB to take on more risk, to create a better local network and to do more lending without increasing the cost for the EU is again just cynical! And if it did, it would create more competition with the national development banks, which is exactly what was supposed to be avoided by a new European Financial Architecture for Development. 3. The EU is the third largest donor in the world. But it lacks the instrument, that all the other donors have! The US have just upgraded their banking institutions in this field. China has created a bank and EU Member States have rushed to be part of it, the Arab countries have their banks, the BRICS have constituted one, all the countries with big national development programmes have their bank and the UK has just made that move. So where are the arguments, that the EU should not avail itself of such an instrument? In the ten years in which I have been part of the EU's Development Cooperation, I have seen around the globe what difference this makes. So what to do? I think that the think tanks and all people interested in the EU's external action should continue to insist that the EU needs such an instrument and the reality being what it is, there is only one reply, the EIB has to be at the center of such a solution! Better, if we get it in ten years than never. It is a necessary pillar of the implementation of the SDGs, of the Green Deal outside the European Union and of safeguarding the EU's role in the world.

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