The European Investment Bank (EIB) and the European Parliament

MEP Esko Seppänen, 10 November 2000 

The European Union is able to guarantee loans on behalf of third countries. On the free market, an EU guarantee reduces interest rates and thus the cost of borrowing. This is advantageous to those in receipt of aid, whose credit status may be low.

For the EU, guarantees come much cheaper than grants and other direct aid, since they do not entail any direct costs for the EU. Money in respect of the guarantees is transferred annually into the guarantee fund administered by the EIB in return for a nominal fee, from which they are returned, when the loans fall due and in connection with repayment, to the EU’s own budget resources. Interest is paid on the resources transferred to the guarantee fund, and this is also released to income as EU budget own resources.

At the end of 1999 there were net resources of EUR 1.313 bn in the guarantee fund.

Losses on these loans have been minimal, and the EU has not generally been called upon to realise its guarantees. In fact credit losses have arisen only in connection with the collapse of the Soviet Union and Yugoslavia, when the problem was the distribution among the successor states of the loans granted to those collapsed federal governments.

There is an upper limit on EU loans to third countries. In practice this is dictated by the guarantee reserve from which transfers can be made to the guarantee fund. The maximum level of this reserve is decided upon in an interinstitutional agreement confirming the funding parameters of the EU budget, and it amounted to EUR 200 m at 1999 values for the years 2000-2007. This sum is corrected annually for inflation, and the guarantee reserve in 2000 is EUR 204 m. 

Various types of loans may be guaranteed from the guarantee fund.

The majority of the guarantees are used to back loans granted by the European Investment Bank to third countries. The basis for conferring guarantees is set out in Council Decision 2000/24/EC, on which the European Parliament expressed its opinion in autumn 1999 in the Rühle report. Because this is compulsory expenditure, Parliament was consulted, but its opinion was not in practice taken into account. Owing to the legal basis, Parliament does not have much opportunity to influence Council decisions.

The Council decided that the amount of the guarantee should be 65% of the nominal amount of the loan granted by the EIB, and that of that guaranteed amount 9% should be transferred from the reserves to the guarantee fund. Accordingly, in respect of a EUR 100 m loan, for example, a transfer of EUR 5.85 m has to be made from the reserve to the guarantee fund.

If the whole annual reserve of over EUR 200 m is not used up on guarantees, the margin saved may not be transferred for use on guarantees for the following year. That year has its own quotas for that purpose. In granting macro-economic aid, the whole guarantee fund transfer must be made the first year, even if the loan is taken out over several years.

The guarantee fund is also used to guarantee loans other than those of the EIB.
In practice the other main subject of guarantees is macro-economic aid. This is generally granted to third countries in conjunction with an aid package from the World Bank and the International Monetary Fund, and in practice the loans are granted in accordance with the economic policy conditions imposed on these countries by those organisations. These loans are always covered by a 100% guarantee.

In principle it is also possible to allocate guarantees from the guarantee fund for 'Euratom loans' to cover third countries’ nuclear technology projects and even to cover loans to the Member States for projects within the EU, but in practice the proportion of guarantees for this purpose has been insignificant.

However, it appears that in the next few years guarantees from the guarantee fund are going to be set aside for Euratom loans. The Commission may use Euratom loans to promote nuclear safety in the countries of Central and Eastern Europe, and it has a budget of EUR 1 100 m freely available for that purpose. These loans, too, require to be covered by a 100% guarantee.

On 29 May 2000 Bulgaria was granted a Euratom loan of EUR 212.5 m, but this does not appear among the new guarantees of the guarantee fund, because the Commission made transfers for this loan from the reserve to the guarantee fund as far back as 1994. These transfers were made in respect of an excessively large loan amount of EUR 400 m, under the old conditions of the guarantee fund (whereby the amount of the transfer had to be 14% of the nominal amount of the loan). Accordingly there is an amount of EUR 70 m in the guarantee fund in respect of Bulgaria’s Euratom loan, of which only EUR 19 m actually belongs to the loan granted to Bulgaria (9% of EUR 212.5 m).

The Commission interprets this as meaning that it can use the EUR 70 m in the guarantee fund for guaranteeing other Euratom loans, while it considers it can use the ‘surplus’ EUR 51 left in the fund (on the basis of the new 9% transfer requirement) to grant new Euratom loans to the tune of over EUR 500 m. Without significant new transfers from the reserves to the guarantee fund, the Commission intends to grant Ukraine a EUR 657 m Euratom loan, in addition to which it also intends to propose new guarantees in respect of a EUR 254 m Euratom loan to Romania.

The example of Bulgaria shows that a transfer may be made from the reserves to the guarantee fund, even if no loan has yet been granted or called upon, and that there is therefore no longer any need for a new transfer of funds at the time when the loan is actually granted.

It is possible to guarantee from the guarantee fund a larger nominal amount of EIB loans, only 65% of which is guaranteed, than of macro-economic aid. For this reason the EIB’s share of the loans granted has increased. The EU is able to grant a larger amount of aid through the EIB than it can grant in macro-economic aid.

Set out below is the Commission’s estimate (in EUR m) of the amount of the guarantee reserve, the share of that amount granted by the EIB for loans, and the EIB's scope for granting new loans as a result:

Guarantees for new loans have been allocated from the guarantee fund to the EIB in respect of the years 2000-2007 for at least EUR 3 bn a year. If these guarantees are subtracted from the total quota, only a small proportion of the guarantee reserve remains for macro-economic aid (or Euratom loans), of which at least EUR 400 m can be granted per year.

In 2000 the guarantee reserve was fully utilised for new loans, and the last additions to the guarantee fund were adopted when Croatia and Turkey were approved as creditor countries guaranteed by the EIB.

In 2001 the resources in the guarantee fund will not be enough for all the commitments entered into. The same is likely to be true in 2002.

If the commitments are to be honoured, the maximum level of the guarantee must be reconsidered. This must be done in cooperation with the Commission and the Council by amending the interinstitutional agreement and reviewing the funding band upwards in Chapter 4 of the Budget .

Chapter 4 is controlled by the Commission and comprises the EU’s external activities. The resources in this chapter are affected considerably by the funding of reconstruction efforts in the region of former Yugoslavia. The European Parliament and the Council are on a collision course on this matter, because the Council has not been prepared to review the funding band, i.e. the upper limit of funding in this chapter , and therefore, because of the reconstruction of the former Yugoslavia region, cuts are being called for in the other outgoings from Chapter 4.

It is possible that, if no new funds are granted, the commitments of the guarantee fund will be met by reducing the level of the required transfer from the reserve to the guarantee fund (9%). The Council may carry out this budget trick on its own initiative, admittedly consulting Parliament, but doing no more than that.

Parliament for its part wishes to be involved in the setting of priorities as regards both loan allocation and efficiency assessments. Parliament feels that macro-economic aid is granted too much on the harsh terms of the World Bank and the IMF, since the EU has no procedure of its own for monitoring the use of loans. Parliament is not convinced of the effectiveness of the EIB’s activity. The loans to it guaranteed by the EU are a risk-free activity and therefore it does not need to be concerned with the use of the loans but only with their repayment.

The European Parliament’s Committee on Budgets considers that the EIB should have been set criteria to meet in its granting of loans. In fact the Commission may be of the same opinion. It has one person on the Bank’s 25-member board, and this does not make it possible to monitor effectively the administration of the bank.

This democratic deficit is also clear from the fact that the EIB does not permit the representatives of the anti-fraud authority OLAF to investigate its granting of loans or its administration, and for this reason the Commission has brought an action against the Bank before the Court of Justice.

It is clear that the problems with the management and supervision of the EIB are a result of the fact that its administrative bodies are staffed with Member States’ representatives, who may wish to prevent the Commission and the European Parliament from stating an opinion on the Bank’s affairs. For this reason the EIB is one of the world’s last havens of complete secrecy in the public banking field. It would not be hard for it to grant EUR 25 bn in loans in the next few years for purposes guaranteed by the EU, about which the guarantor is not permitted to issue an opinion.

[ Arcticles in English | seppanen@kaapeli.fi ]