Philippe Maystadt, president of the European Investment Bank, tells Karina Robinson of the need to convince citizens that there’s no gain without pain.
Two smokers hanging out at the entrance to the European Investment Bank (EIB) in Luxembourg politely said “bonjour” as I entered its concrete headquarters. The European Union’s bank, which is the largest international lender in the world, as well as the largest supranational bond issuer, is like that. Politely resolute and just a little bit subversive. Rather like President Philippe Maystadt.
Take his views on Basel II. Multilateral institutions are not obliged to apply the new banking regulations. “We decided we will apply the rules. This might induce more volatility in our results and make forward commitments more difficult. [But] we are quite determined to apply best practice,’’ he says, speaking in his nondescript office.
At 56 years old, with three grown-up children, his modest manner belies an outstanding career as the longest serving Belgian minister of finance – a 10-year stint – as well as the longest serving chairman of the powerful Interim Committee of the International Monetary Fund. (This does not stop him criticising the institution: “The IMF should refocus on its core. It has extended too much. It has a tendency to intervene and give lessons in areas where others have more expertise – in the ILO [International Labour Organisation] and sometimes across the street at the World Bank.’’)
Behind the scenes actor
He is well-known and appreciated by his peers. This is evidenced by his invitation to all Ecofin gatherings, as the regular meetings between all EU and accession country finance ministers are known. Yet he is not that well known outside these circles, despite his distinctive shock of white hair and eyebrows, an inherited trait which struck him when 35 years old, and that contrasts with a relatively youthful face.
Neither is the EIB well known, except to capital markets professionals. It raised €42bn last year through 310 bond transactions in 15 currencies and is set to raise up to €47bn this year. The bank is respected as a sophisticated, innovative AAA borrower, for which it has won prizes.
It is developing capital markets in the accession countries by, among other measures, being the largest non-government bond issuer in accession country currencies.
But the fact that it made loans worth €42.3bn last year – as usual more than the World Bank – and has outstanding loans of €248bn is little known. As is the fact that it has made loans of some €25bn in the accession countries, where it is looking to increase activity 10% a year.
Partly, it tends to be confused with the European Bank for Reconstruction and Development. Mr Maystadt was offered the first presidency of this bank tasked with helping ex-communist countries make the transition to market economies.
He admits the idea of living in London was exciting but the Belgian king asked him to stay involved in Belgian politics. If he had been in charge instead of the EBRD’s first president, Jacques Attali, it is doubtful the institution would have hit the headlines due to the hugely expensive marble ordered for its headquarters.
One can certainly vouch for the excitement of London, as opposed to Mr Maystadt’s current Luxembourg and Brussels beat. The soulless buildings of the EU grouped together near the EIB are matched by some of the restaurants, like the Italian one in the Sofitel hotel where we repaired for a salad and fish lunch. A bit of balsamic vinegar does not make up for a half-empty restaurant with a few other tables filled with eurocrats. (Not that I mean to sound ungrateful as considerate Mr Maystadt changed the lunch reservation on finding out I liked Italian food. And very good it was too.)
Establishing the EIBs remit
The EIB, unlike the EBRD, has been around since the 1958 Treaty of Rome. It has had its remit better defined by Mr Maystadt, a keen reader whose shy upward look is reminiscent of Princess Diana’s. The bottom line is that its loans should support EU objectives. The board of governors is made up of the finance ministers of the member states, who share with Mr Maystadt concerns about Europe’s lacklustre economy.
“The growth potential of Europe is too weak. The Lisbon strategy [of making the EU economy more information and knowledge-based in order to increase its competitiveness] is the only way. [But] there is too much talk and not enough action. I would hope governments would adopt all chapters, including labour reforms,’’ he says. “But if a government tries to implement the necessary measures it is penalised. That is what happened in France [in recent elections where there was a backlash against the current government].’’
Mr Maystadt’s suggestion is to create the same support for the reforms as that which brought the euro, where governments forced to take unpopular budget-cutting measures were able to point to neighbouring states busy doing the same and thus convince their citizens the pain was worth it.
New initiative
In June last year the EIB designed the “Innovation 2010 Initiative’’ whereby it makes loans in areas that support the Lisbon agenda in both existing and future member states. Its other aims are for up to one-third of lending to be directed to projects that directly improve the environment, to ensure two-thirds of loans go to regions lagging behind the EU average, to support EU policy in poorer countries outside the Union and to help in building trans-European networks (TENs).
Interestingly, despite providing large amounts – €50bn planned for 2004-2010 – Mr Maystadt’s view of TENs differs from that of some governments, such as Italy, which see large scale infrastructure projects as a way of re-activating the EU economy. “We consider TENs a way to reap all the benefits from the single market. I don’t like the Keynesian idea that they will stimulate the economy. They are not instruments for a short-term recovery,’’ he says pointedly.
Infrastructure lending
The EIB’s participation in these large projects is appreciated by commercial banks which rely on its ability to lend for longer maturities (often 25 years), its knowledge of cross-border legal complications and its outstanding record in project loans. “When we look at our record, almost all have been successful except for one notable exception,’’ he says.
“The Channel Tunnel?’’ I ask.
“Yes,’’ he admits with a chuckle. Mr Maystadt believes the lesson learned from that ongoing financial fiasco is the impossibility of building and managing such a big project without the clear involvement of public authorities on both sides. The bank recently resisted French and Italian pressure to help finance a Lyon-Turin railway link, unless both governments took on the commitment.
Criticism answered
A highly critical report by a member of the European Parliament, Mónica Ridruejo, thrust the EIB into an unwelcome spotlight in March. The report’s conclusions were disputed by her colleagues in the economic and monetary affairs committee who said it was factually inaccurate and lacking in quality. Allegations include excess risk-taking, failures in corporate governance and a lack of environmental concern.
Mr Maystadt acknowledges the validity of some of the criticisms but alleges the report’s mistakes detract from its credibility. For example, Ms Ridruejo criticised the bank for lending the largest amounts to Germany, a developed nation. However, this is a recent occurrence dating from reunification. In the last five years 19% of total loans were directedat projects in the former East Germany, where income per capita is 70% of the EU average.
Soft-spoken Mr Maystadt also scoffs at the suggestion of excess risk: “We have a risk management system that is state of the art. Our shareholders think the opposite, we should take more risk.’’
The total of outstanding loans cannot exceed 250% of the bank’s capital, which was recently raised by 50% out of its retained funds to €150bn. By keeping its AAA rating, the bank can raise funds at low rates of interest and pass the benefit on.
As for corporate governance and the environment, the bank has seen major improvements in recent years in terms of accountability and openness to non-governmental organisations (NGOs), although it admits it as further to go. Mr Maystadt gives the report some credence where it suggests faults in the bank’s monitoring of the loans extended to local commercial banks for small and medium-sized enterprises. But pre-report the EIB was already looking at how it receives fuller information on how much of the benefit from its low-cost loans was being passed on to the SMEs.
Mr Maystadt’s term ends in 2005. He says he would like another. The bank governors should oblige. Polite resolution with a touch of subversion is just what the bank needs to continue doing an outstanding job in a quiet way.
