The European Investment Bank: Low Profile, High Aims
It's an all-too-familiar refrain of European politicians: What's needed to get the economy moving is for the government to spend, spend, spend. On Oct. 1, Romano Prodi, the Italian President of the European Commission, put forth the latest such rescue plan, called the Growth Initiative. It would pump nearly $255 billion over the next six years into 29 cross-border transport schemes. But Prodi's proposal was not greeted with unanimous applause. Indeed, there are signs that Europeans are becoming fed up with pork-barrel projects that provide little lasting economic benefit. "There is combined pressure from France, Germany, and Britain to focus the Growth Initiative on the needs of industry, not on building railways and tunnels around Europe," says Barbara Böttcher, a Deutsche Bank economist in Frankfurt
Instead, some government officials in Europe's core economies, including French Finance Minister Francis Mer and British Chancellor of the Exchequer Gordon Brown, want to shift stimulus spending towards high-tech manufacturing such as advanced optics and value-added service businesses like biotechnology. To do this, they plan to harness the lending power of the European Investment Bank, a strong arm of the European Union set up in 1957 to help underdeveloped regions such as Southern Italy. Today, the bank commands an asset base worth $259 billion.
Unlike the unwieldy EU bureaucracies in Brussels, the thinly staffed EIB is based 180 kilometers away in Luxembourg. More important, it is run by a fiscal hawk. EIB President Philippe Maystadt, 55, is a former Belgian Finance Minister who is credited with reining in his country's spendthrift ways. His next target is Europe. "Investing in research and development is at least as important as investing in transport," says Maystadt. "The EU does not devote enough resources to R&D and innovation."
To help correct that imbalance, the bank plans next year to raise and lend as much as $52.1 billion -- a sum which is more than twice as much as the World Bank borrows. About a third of that money will come from Wall Street, which will be offered highly-rated EIB dollar-denominated bonds. The EIB piggybacks on the AAA credit ratings of the 15 EU governments that back it to help it raise money at rock-bottom rates. In the past, it then lent out the proceeds to fund government projects in poorer parts of Europe -- about two-thirds for public works such as roads and sewage pipes.
But under Maystadt's watch, more and more of the EIB's money is being channeled into closing Europe's innovation gap with the U.S. and Japan. In 1999, the bank lent $586.2 million to support basic science infrastructure and corporate R&D; this year it expects to lend $7.2 billion to the sector. Typically, the EIB funds no more than 30% of any project but it can go up to 50% in poorer parts of the EU. It has ponied up money for a number of leading European multinationals, including the Netherlands' Royal Philips Electronics (PHG ), Sweden's Ericsson (ERICY ), and pharmaceutical giants such as Germany's Schering (SHR ). Infineon Technologies (IFX ), which is based in Munich, got $410 million in EIB loans to build a cutting-edge semiconductor research facility.
The EIB president takes his mandate for change from the Lisbon Summit held in March, 2000, where EU leaders called for making research in technology a top political priority. The catch is that the money going into these new fields is coming at the expense of traditional public works, particularly in the richer EU countries, where growth in EIB lending has slowed to only 2% a year since 2001. Another issue: As Europe's fiscal crunch worsens, EU member states are going to find it hard to use the EIB as a piggy bank, since they have to match the EIB's outlays with their own -- and their national treasuries are tapped out. All the more reason for the EIB to pick its projects with care. But if Maystadt can prod governments to let his bank lend more wisely, the EIB may be transformed into a powerful incubator for European business.
By Stewart Fleming in Brussels