Deciphering the European Investment Bank

History, Politics, and Economics

Lucia Coppolaro, Helen Kavvadia, Lucia Coppolaro, Helen Kavvadia

• Verlag: Routledge
• Jahr: 2022
• ISBN:
  9781000596403
• Auflage: 1
• Thema: History
• Thema: World History

Deciphering the European Investment Bank: History, Politics and Economics examines the European Investment Bank (EIB), the European Union's financial institution and the largest lender and borrower among the International Financial Institutions.

Since its establishment in 1958, the EIB has developed without becoming front-page news and has remained highly invisible. By putting together 14 chapters that analyze topical and meaningful moments and aspects of the bank, this edited book offers the first comprehensive analysis of its origins and its evolution in terms of its mandate, governance, structures, policy activity, and performance. Written by acknowledged experts from various disciplines, the chapters weave together history, economics, law, and political science to provide a multidisciplinary examination and capture the complexity of the EIB. The book is a timely initiative for understanding the EIB, whose role has been ever increasing for contributing to the recent global economic challenges, including the economic and financial crisis, climate change, and COVID-19 pandemic.

The chapters are written at a level which will be comprehensible to undergraduates in economics, history, and international political economy. It will also be a valuable source of reference for academics, policy makers, bankers, and other practitioners interested in regional development banks and their role in the global economy.

1A bank, not a fund

Lucia Coppolaro and Helen Kavvadia

DOI: 10.4324/​9781003231592-2

Introduction

Since its creation in 1958, the European Investment Bank (EIB) has served as the financial institution of the European Economic Community (EEC), then European Union (EU). This chapter analyzes the origin of the EIB by tracing the discussions among its six founding members (the Six) between 1955 and 1957 that led to its creation.¹ The inception of the EIB should be understood by placing them in the negotiations leading up to the establishment of the EEC and considering the different aims its founding members pursued during these negotiations and how these differences were ultimately accommodated. Although the six countries together formed one of the highest developed regions in the world, with pronounced banking activity and investment, they realized a common need. This need resulted from a market failure in stimulating regions lagging in terms of development.²

The chapter firstly shows that the establishment of the EIB stemmed from the understanding that a financial institution would be required to direct capital toward underdeveloped regions and struggling industries to ensure a balanced transition to a common market – despite the marked differences between the economies of the member states – by deepening European economic integration. Beyond its institutional vocation – “work in close connection with the Commission of the European Economic Community and solely at the service of the Community”³ – the member states sought equally market-making characteristics. They believed that such an institution would “contribute to the liberalization of capital movements⁴ …[and] the progressive unification of the capital markets of member countries.”⁵ The idea of establishing an autonomous lending institution to improve the process of economic integration was consistent with the general attitude of the governments to the creation of the EEC – specific institutional measures would be required to minimize and offset the difficulties and negative effects that would predictably arise after the introduction of a common market.

Second, the chapter illustrates that, despite this common ground, no agreement existed on the exact function and structure of such a financial institution. At one end of the spectrum, the government of the Federal Republic of Germany led those who supported the creation of a bank that would borrow from the international capital market to finance projects of a bankable nature. At the other end, the government of Italy wanted the establishment of a fund that would lend financial assistance here to projects or give grants from national budgetary sources to achieve social aims. The negotiations that ultimately led to the creation of the EIB oscillated between these two poles. However, the negotiations proved even more difficult in reaching an agreement on what exactly this institution should be doing. Its priorities, the way that it would finance itself, and finally its governance and management had been strongly debated and negotiated among the founding members. Divergent views were grounded in different approaches to the common market.

The final decision to set up the EIB as a bank, rather than a fund, that could participate in international capital markets required the EEC members to not only provide the EIB with its own financial resources but also its own legal personality so that it could, by having autonomy of action, earn credibility within the capital markets.

The decisions taken at the outset concerning the EIB led to the creation of an institution with a unique dual nature, of a bank as well as a European body, which enabled: i) a perpetual self-financing ability, neither limited to nor burdening European and national budgets; ii) an availability of high volumes of funds to support ever-changing European objectives; iii) a tangible and lasting contribution to development as bankable projects are mostly viable, unlike those often funded through grants; iv) the liberalization of capital movements; and v) a participatory effort for the unification of European capital markets. Consequently, these decisions have had a long-lasting impact on European integration, visible to date.⁶

The origins of the EIB have already been examined by the academic community.⁷ The chapter builds on the existing scholarly literature and is mainly based on archival sources, setting the stage for a book aiming to decipher the EIB. It posits that the need for establishing a financial institution at the European level had been felt well before the signing of the Treaty of Rome. The need had been generalized, albeit to different degrees, as evidenced by the proposals addressing the need put forward by both Southern and Northern countries of the Six.

The chapter follows a chronological order, structured around main areas of concern. First, the chapter links the common market to the need for a financial institution; second, it presents the discussions concerning the founding of a financial institution that took place around the Spaak Report; then the chapter showcases the compromise reached among the founding members for the creation of a financial institution and it addresses the elements that influenced the establishment of a bank instead of a fund; the main findings are presented in the conclusion section.

Centripetal forces linking the common market to a financial institution

In the aftermath of WWII, Western European countries headed toward regional economic cooperation for reconstructing their economies, fostering economic growth, and enhancing political and social stability. In the framework of the European reconstruction, the promotion of investment took center stage in the regional cooperation and integration plans in the 1950s. In 1949, the French government presented before the Organisation for European Economic Cooperation (OEEC) a schedule of investments to be carried out by a European investment fund. This suggestion, coined after the Minister of Finance as the Petsche Plan, foresaw a fund for increasing the competitiveness of European industries, promoting the member states’ balanced development, and improving their economic and social cohesion. Being the first recipient of an International Bank for Reconstruction and Development (World Bank) loan,⁸ France proposed an initiative inspired by the interventionist ideas of the intellectual leader such as Bretton Woods, John Maynard Keynes, and the Marshall Plan for post-war reconstruction efforts in Europe. The initiative responded to the beliefs that economic growth should be stimulated through investments and that the conditions of increased competition, following the establishment of an integrated common market, ought to be offset by specific instruments to enable the member states to adapt to the new environment. Liberalization of trade would have to be accompanied by measures favoring the economic convergence of the participating countries. This plan, however, did not receive the support of the entire French government, nor was it supported by the politicians outside France, who were opposed to the idea of harmonization and planning.⁹

In 1953, the Dutch Foreign Minister Johan Willem Beyen presented before the Council of Ministers of the European Coal and Steel Community (ECSC) a memorandum outlining a plan for wider economic integration through the establishment of a common market, also envisaging a European fund for modernizing and restructuring the economies of the member states.¹⁰ As a follow up of the so-called Stikker Plan of 1950, the Dutch aimed to set up a reconversion fund rather than an investment fund, but like the French proposal, it was grounded on the belief that the conditions of increased competition ought to be tempered by specific instruments. In response to the Dutch plan, the French government again put forward a plan for stimulating investments to increase the productivity of the industrial sector. The Dutch memorandum was not accepted by the Council of Ministers of the ECSC, so both the Dutch plan and the French proposal came to nothing. While neither the Dutch nor French initiatives specifically described the methods by which their proposed funds would raise the required financial resources, both initiatives responded to the necessity for coupling the establishment of a common market with a finance institution to channel investments.¹¹

In May 1955, the Benelux Countries submitted before the ECSC a memorandum based upon the Beyen Plan of 1953. The plan advanced the suggestion to establish a common market, called for the sectorial integration of electricity, transport, and nuclear energy, and also proposed the creation of a reconversion fund. At the ECSC Messina Conference of June 1955, the plan for creating a common market was added to the agenda of the Six, and the plan for an investment fund was again put forward within this framework.¹² The Italian delegation tabled a memorandum that emphasized that the countries forming a common market should facilitate the necessary adjustment of their economies through a reconversion fund and implement a policy favoring areas that lacked capital. Italy, therefore, called for the setting up of a European fund of integration, conceptualized in the Pella Plan, named after the incipient Italian minister who brought forward the proposal. An investment fund, which would channel the capital to regions – like the south of Italy – that traditionally lacked them.¹³ The German delegation also called for the establishment of a fund that would encourage productive investments and contribute to lessening the wide and social disparities in living standards between the regions of the future member states, interested in supporting among others the “Zonenrandgebiet,” the bordering areas of the Federal Republic of Germany facing difficulties in their supply chains.¹⁴ Having already suggested a coordination of investments in 1949 and again in 1953, France welcomed the idea of an investment fund.¹⁵

The Messina Conference's final resolution called for a study on integration in the transport and energy sectors and the establishment of a common market.¹⁶ The foreign ministers agreed that economic integration could be based on common institutions, a common market, coordinated social policies, a gradual fusion of national economies, and sectoral integration in the fields of energy and transportation. The resolution recommended suggested studying the possibility of creating a European investment fund aimed at Europe's development, in particular the growth of the lagging regions of the participant states.¹⁷

The need for establishing a financial institution at the European level has been acting as a centripetal force for closer cooperation and increased integration between the Six.

Centrifugal forces on the form and modalities

The Messina Conference also witnessed centrifugal forces. The Six arrived at a basic agreement that the differences in their respective national economic structures would present obstacles to any integration. Certain regions were more developed than others; productivity varied among regions, member states, and sectors, and there were vast disparities in the availability of infrastructure in different parts of the member states. In such a case, the intensification of competition would exacerbate the existing inequalities across regions, states, and sectors. To overcome these obstacles and ensure the smooth implementation of a balanced common market, large-scale investments were considered necessary. Thus, the establishment of an investment institution was widely regarded as a necessary corollary for the creation of a common market. Following the Messina Resolution, Foreign Ministers of the ECSC, therefore, agreed to set up an intergovernmental committee, headed by the Belgian Minister of Foreign Affairs Paul-Henry Spaak. The committee formed four commissions to deal with: i) conventional energy and nuclear energy; ii) transport and public work; iii) the common market; and iv) investments and social issues. The task to possibly establish an investment and reconversion fund was assigned to the last commission, and because of the technicalities involved in creating a new investment fund, the task of examining related issues was assigned to a subgroup of experts chaired by the Italian Giuseppe Di Nardi.¹⁸ In preparing its report, the sub-group used as a reference point the Statute of the World Bank, the only international organization dealing with investments at that time. The report issued in October 1955 revealed a general agreement on the establishment of an investment fund. The agreement, however, ended there. Stances were polarized on functions, structure, governance, and management, and, broadly speaking, whether the institution had to be a bank or a fund.¹⁹

Germany and the Benelux Countries supported the creation of a fund that borrowed on the international capital market to finance its lending, which would be based purely on economic needs and limited to productive investments. According to this approach, the fund had to be a bank that would provide bankable loans, and not grants, run with business principles, and be independent from the political control of the member states. Germany firmly opposed the proposal for a fund financed by European and/or national budgets. Being the richest among the six countries in terms of GDP, Germany feared that it would be asked to make the greatest financial contribution to the fund's resources.²⁰

Additionally, different countries had diverging views concerning the tasks of such a financial institution. The positions of France and Italy differed in important respects. For the French, the fund had to be established with a fairly broad function so that it could conduct operations in various fields, most notably regarding the rationalization of the productivity structure, the development of less-advanced regions, and the reconversion of enterprises. In principle, the fund would finance economically viable projects. This mode of financing would take a wide range of forms: from loans and guarantees to straight subsidies, as well as allowances for workers to help them find new employment. Thus, the French considered that the fund ought to play a significant role in the private sector – as evidenced by the need for reconversion – and should also provide not only loans and guarantees but also redeployment allowances and grants. In this sense, France wanted a hybrid financial institution that would perform a social role in curtailing the negative effects that would likely arise from the implementation of a common market. As for the finan...