The Role of the European Investment Bank (RLE Banking & Finance)

Sheila Lewenhak

• Publisher: Routledge
• Year: 2012
• Print ISBN:
  9780415539364
• eBook ISBN:
  9781136265198
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This volume draws together diverse sources of information from the EIB's own reports and bulletins, as well as reports of the Us Federal Reserve Board, the IMF and OECD, together with press and journal sources to examine the history, borrowing and lending operations from 1958-1980. It also discusses some of the environmental and social effects of its lending activities. Some consideration has also been given to the bank's operations beyond EU boundaries. The book sheds light on an important EU institution which is crucial to EU member states' infrastructure, industry and economy.

Chapter 1

THE ORIGINS, CHARACTER AND STRUCTURE OF THE EUROPEAN INVESTMENT BANK

It is generally agreed that large-scale investment in infrastructure and industry has considerable impact on the environment and on employment. This has been borne out within the European Economic Community countries of west Europe over the last quarter of a century, with the growth of motorways, energy projects, especially nuclear power, water supply schemes and telecommunications. There has been rapid growth in petrochemicals, and a decline in iron and steel production while southern peasant economies have been disrupted. The major investor in infrastructure and large-scale industrial projects for the EEC has been the little-known and little-publicised European Investment Bank. In order to comprehend developments in employment and the environment within the Community and its Associated States, it is essential to understand how the European Investment Bank operates and the policies it has been pursuing.

a) THE ORIGINS OF THE EUROPEAN INVESTMENT BANK

The European Investment Bank is the main long-term financing institution of the European Economic Community. It was established by Articles 3(j) and 129 of the Treaty of Rome which created the Community in 1958. The European Investment Bank is the chief EEC institution channelling into Community countries finance from the world's capital markets.

Besides its role as the Community's major source of loans for public developmental projects in member states, it is also of considerable importance in providing investment for private industrial development since it is mandated to step in with loans when no other source of finance is available on ‘reasonable terms’. It has therefore been the decisive factor in whether or not certain projects could proceed.

TABLE 1a: DEVELOPMENT OF EEC FUNDS AND LENDING FACILITIES OTHER THAN THOSE FOR AGRICULTURE

The Treaty of Rome laid down the EIB's complete autonomy from other Community institutions as Table 1a shows, and it was given its own Statute.¹ It is a separate legal entity from the EEC Commission but obviously the two institutions are linked since both are under the control of the EEC countries’ governments and they maintain liaison with one another.

As the Bank pointed out in its first Annual Report in 1958, by creating not another fund, but a bank, the six member states:

set aside more direct financial intervention methods which no doubt would not in the long run have enabled adequate resources to be raised. They particularly wished the promotion of investments…to be carried out by existing banking houses….

That is, they wished to utilise the commercial world banking system, with the EIB providing ‘an additional source of financing which might prove decisive’ in creating or furthering projects they wanted realised.

Thus, the European Investment Bank, unlike a number of other EEC funds, is not a ‘caisse’ wholly dependent on contributions from member states.² The distinction is important since the autonomy of the Bank rests partly on the fact that it has to provide most of its own funds.^*

b) REASONS FOR CREATING A EUROPEAN INVESTMENT BANK

Article 130 of the Treaty of Rome defined the purpose of the European Investment Bank as:

To contribute to the balanced and smooth development of the Common Market in the interest of the Community.³

The six founding states, The Federal Republic of Germany, France, Italy, Belgium, Holland and Luxembourg, were anxious to provide financial help to the least developed of their regions. While the Community was controlled by national governments of the member states, its integration and growth depended on diminishing national concepts and emphasising regional ones. In this way a single political and economic entity, it was said, would emerge in place of a collection of nation states. The founding member countries also wanted to overcome low productivity in various economic sectors, to improve inadequate parts of their communication systems and to increase electrical power in order to promote greater industrial development and higher living standards. Because they wanted to create new economic activities and installations on a supra-national Community scale, big investments would be needed.

TABLE 1b: Capital Subscriptions by EEC Member Countries to the European Investment Bank (in millions of EIB units of account : see Chapter 2 and Appendix 2A)

SOURCE:

EIB 1958–1978, 63 : EIB 1979 Annual Report, 72.^* EIB Press Release, 15 June, 1981.

^* Each member state contributed its share of paid-up capital in its own currency. The contributions are paid in an agreed number of equal instalments over a fixed period of time, e.g. 10% of the 1978 increase to be paid in 8 equal instalments on 30 April and 31 October of the years 1980–83 : 7.5% of the 1981 increase is to be paid in 8 equal half-yearly instalments starting on 30 April, 1984, so that the total will be wholly paid up by October 1988.

NOTE TO TABLE 1b: The original capital subscribed by the six member states in 1958 and the increased subscriptions in 1971 and new subscriptions in 1973 were both expressed in terms of the original gold/US $ value of the EIB's unit of account. The 1975 subscriptions were calculated on the new system of the sum of the fixed amounts of member states’ currencies, then still linked through the connection with the IMF's Special Drawing Right to the old gold parity. The 1978 and 1981 subscriptions were entirely on the new Euro system after the gold parity had been dispensed with. The important point is the overall increase in capital subscribed by member states which gave the EIB more funds with which to operate on the international financial markets.

The ‘six’ constituted a part of the world in which banking was highly developed and where the rate of investment was very high. However, during the preparation of the Treaty of Rome it became evident that there was a danger that depressed areas or economic sectors would not be able to find sufficient financial resources through the existing banks in the EEC to achieve improvements. Through the normal commercial mechanisms funds would be attracted to successful rather than deprived or unsuccessful areas and enterprises. As the EIB explained:

At Community level, and along the line of action of the Community, this bank would be able to examine these new problems of financing in common and help to solve them.⁴

c) THE FUNDS OF THE EUROPEAN INVESTMENT BANK

In order to create the European Investment Bank, the governments of the six original EEC countries, the Federal Republic of Germany, France, Italy, Belgium, the Netherlands and Luxembourg, subscribed its initial capital from their national treasuries (see Table 1b). When Britain, Denmark and Ireland joined the Community in 1973 and Greece in 1981, the allocation of the Bank's subscribed capital was altered because each of these new member states provided further funds.⁵ Consequently, each member state paid a smaller percentage of the EIB's total subscribed capital. There will be a similar adjustment when any other country joins the Community.

The Bank's subscribed capital was also increased by existing member states in 1973, 1975, 1978 and 1981 to enable it to maintain or expand its operations on the world's financial markets and to take account of inflation.

Only a proportion of the total amounts of capital subscribed by member states is ever actually paid over. The rest remains in the form of guarantees. While the ratio of paid-up to subscribed capital has fallen progressively from 25 per cent in 1958⁶ to 9.8 per cent in 1981, i.e. by well over half, the actual amounts of cash have risen because of increases in the amounts of subscribed capital. The capital, both paid-up and guaranteed, besides being an important resource in itself, helped to establish the credit-worthiness of the EIB in international markets, so that loans it floated to finance Community projects have readily attracted investors. In addition, a reserve fund of up to 10 per cent of the subscribed capital was built up.⁷ Meanwhile, the assets, which the guaranteed capital represents, remain at the disposal of member governments and can be used either in financial markets to earn more money through interest, or to buy capital assets.

The Bank has been helped to build up its reserves because the member states charge no interest on the capital they subscribe. In addition, the Bank is non-profit-making. Together with the very high credit standing which the Bank has achieved, these factors have enabled it to keep interest on its loans low. The EIB uses the paid-up portion of the capital mainly to buy interest-bearing stock, thus generating income for itself. The capital subscribed by member states cannot, however, be given as collateral security and is not attachable. The subscribed capital is also the factor limiting the amounts outstanding in loans and guarantees. These amounts must never exceed 250 per cen...

Table of contents

• Front Cover
• Half Title
• Title Page
• Copyright
• Title Page
• Copyright
• CONTENTS
• List of Tables
• List of Appendices
• List of Maps
• List of Figures
• Acknowledgements
• Note
• Chapter 1 THE ORIGINS, CHARACTER AND STRUCTURE OF THE EUROPEAN INVESTMENT BANK
• Chapter 2 THE EIB'S BORROWING OPERATIONS AND REACTIONS TO MARKET CHANGES
• Chapter 3 THE LENDING MECHANISMS AND POLICIES OF THE EUROPEAN INVESTMENT BANK
• Chapter 4 THE RELATIONS BETWEEN THE EUROPEAN INVESTMENT BANK AND THE COMMISSION OF THE EUROPEAN COMMUNITIES
• Chapter 5 EUROPEAN INVESTMENT BANK LENDING FOR ENERGY PROJECTS OTHER THAN NUCLEAR POWER
• Chapter 6 THE EUROPEAN INVESTMENT BANK'S LENDING FOR NUCLEAR POWER PROJECTS
• Chapter 7 THE EUROPEAN INVESTMENT BANK'S LENDING FOR TRANSPORT
• Chapter 8 THE EUROPEAN INVESTMENT BANK'S LENDING FOR WATER SUPPLY PROJECTS IN THE EEC
• Chapter 9 THE EUROPEAN INVESTMENT BANK'S LOANS FOR LARGE-SCALE INDUSTRIAL ENTERPRISE WITH SPECIAL REFERENCE TO EMPLOYMENT
• Chapter 10 EUROPEAN INVESTMENT BANK FINANCING FOR STEEL AND TELECOMMUNICATIONS
• Chapter 11 EUROPEAN INVESTMENT BANK LOANS FOR THE CHEMICAL AND CHEMICAL RELATED INDUSTRIES
• Chapter 12 THE EUROPEAN INVESTMENT BANK'S LENDING FOR SMALL AND MEDIUM-SIZED ENTERPRISES
• Chapter 13 THE EUROPEAN INVESTMENT BANK'S LOANS FOR ENVIRONMENTAL PROTECTION AND ENERGY CONSERVATION IN THE EEC
• Chapter 14 THE EUROPEAN INVESTMENT BANK'S FINANCING IN SOUTH EUROPEAN AND MEDITERRANEAN COUNTRIES AND IN THE MIDDLE EAST
• Chapter 15 EUROPEAN INVESTMENT BANK'S FINANCING IN THE REST OF THE WORLD
• Chapter 16 CONCLUSIONS
• Index