Diagnosis Europe

When delegates representing the Inner Six met on the Capitoline Hill in Rome in 1957 to sign into existence the European Economic Community, they could not have known quite how comprehensively their vision would come to be realised over the next half-century.
The Treaty of Rome's initial premise was to create economic integration, including a single market, between Belgium, France, West Germany, Italy, Luxembourg and the Netherlands. Fast-forward 53 years and, regardless of political leanings, one must acknowledge that such aspirations have been more than surpassed. Enlargement and the addition of policy remits have seen the European Union (EU) grow in power and influence exponentially. Sixteen of the EU's 27 member states now share a single currency and the European Economic Area, the ultimate implementation of the treaty's goal, boasts 30 full members.

While all this might be quite unrecognisable in scale to those pioneers of the 1950s, there is one institution still standing that they would be quick to identify. Founded at the Treaty of Rome as the long-term lending bank of the EU, the European Investment Bank (EIB) is a non-profit, policy-driven body that continues to wield significant influence when it comes to implementing the union's agenda. Member states subscribe jointly to its capital, with individual contributions reflecting GDP, although the EIB is self-financing and borrows on the financial markets through its AAA credit rating.

The bank's ultimate task is to support EU policy. Its focus is invested in six main areas: cohesion and convergence of EU regions; support for SMEs; environmental schemes; research, development and innovation; transport; and energy. However, as Europe found itself in the grip of the worst financial crisis seen during the EU's lifetime, this scope began to shift. Lending from commercial banks ground to a halt, large corporates found themselves with little or no access to credit and the EIB was forced to step into the breach.

New territory

In previous years, corporations accounted for around one third of the EIB's portfolio, but in 2009 the proportion had climbed to 42% of its loan book and accounted for some €12.1 billion. The man overseeing this seismic cultural shift was the bank's president, Philippe Maystadt.

As a former Belgian minister of finance, it is not a stretch of the imagination to suggest Maystadt may have been leading his country's delegation in the Italian capital had he been born into that first generation of integrationalists. A committed Europhile, he supervised Belgium's entry into the eurozone and previously served as governor of the European Bank for Reconstruction and Development. Expanding the short-term remit of operations at the EIB was clearly a challenge equal to anything else in a long and illustrious career, but the 62-year-old is clear that there was no other option available, especially when the alternative was to see some of the continent's most powerful businesses and industries risk stagnation or bankruptcy.

"We had to play the role of substitute, but this was never about working to the detriment of, or in competition with, established commercial banks," he reveals. "An explicit request was made by our shareholders in December 2008 and the message was spread by member states and professional associations. We did not approach large corporates and plead with them to come to us because we could offer competitive rates. A significant amount was lent to the car industry in 2009, for example, but there certainly wasn't any special marketing tool developed. Bodies such as the European Automobile Manufacturers' Association explained to their members that it might be a good idea to look into what we could offer, and we took it from there."

But if the EIB, which is legislatively obliged to only finance projects that are economically, financially, technically and environmentally sound, was agreeing to intervene where commercial players refused to tread, surely the level of risk to which it exposed itself skyrocketed? Maystadt bats the suggestion away dismissively and points to the bank's loan book as evidence.
"Only if you interpret a rise from 0.3% to 0.4% of our total portfolio being on our loan watch list as a significant rise," he chuckles. "And being on our watch list does not mean non-performing; it's simply those loans we feel must be monitored more closely."
And the signs are that risk exposure will decrease as commercial banks find their feet once more. Maystadt has already seen a marked pick-up in activity and believes that this can only be a positive sign for the European economy as a whole.

"Our level of lending to large corporates was exceptional rather than the rule," he says. "We are now witnessing a significant recovery in credit markets and they can access traditional routes once more. The banks have resumed lending, so big business is not knocking at our door to the degree it was 12 months ago, and it should be indicative of a more general recovery."

Small is dutiful

There does remain an area for concern, however. While credit for large corporates returns, the indicators are less promising for SMEs. The EIB lends to banks on the proviso that such funds are used to support small and medium-sized companies. In 2009 the volume of signatures for money being funnelled in this way was up 55% on the previous year, accounting for €12.7 billion. Maystadt believes this situation will be more difficult to rectify.

"Commercial banks have resumed lending to established corporates at better conditions," he says. "But if you look at the latest survey figures from the European Central Bank, the same cannot be said for smaller enterprises, with serious restrictions to credit still being applied. Here we can still play an extremely important role, and it is an area we will have to focus on for some time to come."

Other areas that saw significant growth in lending during the crisis were energy and climate change projects, and what in EU jargon are known as 'convergence areas' - member states or regions eligible for structural funds and poor regions most hit by the financial turmoil. The former saw levels of lending rise 73% to €17 billion, while the latter increased 36% and stood at €29 billion, following an executive decision taken at the bank to focus more extensively on three of its six core areas in order to help Europe and European interests to better weather the financial storm. As we continue down the road to recovery, however, its remit is expanding once more.
"Moving forward you will see a particular focus on innovation from the EIB," Maystadt reveals. "This is linked to the current discussions around the so-called Europe 2020 strategy, developing a knowledge economy. The commission has proposed a move towards 'smart growth' and we will play a big part in making this happen."

This role as a driver for EU policy is something the EIB president believes his institution had come to overlook, but has rediscovered in the course of his ten years at the helm. It has been a gradual shift that was reinforced by the financial crisis. "Look back to our formation in 1958 and you'll see we were created to support the policy objectives of what was then the European Economic Community," he explains. "I would not say that this vision was ever abandoned, but it was perhaps not at the forefront of EIB activities a decade ago. Now we are clearly aligned with the EU's vision - one need only look at our work on climate change as a prime example - and are seen as fundamental in helping implement these strategies.

"It was also proven during the crisis that the EIB can deliver. The council asked for commitments on certain areas and governments across Europe saw just how well we responded. I am particularly proud of the fact that we have, once again, become a policy-driven bank without ever compromising our financial solidity. Combining policy objectives with self-imposed technical and financial constraints is quite challenging, but it has also seen us win a great deal of respect."

Survival tactics

With the EIB emerging from the crisis with its reputation enhanced, what now for the European project as a whole? Greece and Ireland have been bailed out by the EU, with suggestions that Portugal and Spain are next in the firing line. As the debt crisis continues apace, serious questions are being asked about its survival.

The EIB is not mandated to offer bailouts to struggling member states, but it can be supportive of projects that meet its lending criteria in such countries. Maystadt believes that some serious lessons have been learnt, but that putting such knowledge into practice could make for a stronger union over the long term.

"It's clear that the financial crisis revealed some weaknesses in the economic governance of the EU," he acknowledges. "The level of sovereign debt in certain member states represented a failure to get those issues addressed at an earlier stage. The Task Force for Economic Governance is formulating proposals that will address this issue in the future. Whether you want to call them sanctions or incentives, I believe policies will be put in place that oblige member states to correct imbalances in public finances and external accounts before things get so bad and require full-scale intervention.

"Talks are heading in the right direction, but the real challenge is maintaining momentum. Once signs of improvement begin to appear, the danger is that people quickly forget how things ever got so bad in the first place. I'm hopeful it will be possible to agree on significant strengthening of economic governance, but there remains some distance left to travel."

For those still in need of some encouragement, one need only look back to 1957 in order to appreciate just how far it is possible to come.