The divorce of Britain and the EU’s bank may get messy

Calculating the UK’s ‘share’ of the EIB is likely to prove difficult and contentious

Ireland’s finance minister Paschal Donohoe talks with Cypriot finance minister Harris Georgiades and president of the European Investment Bank Werner Hoyer. Photograph: John Thys/AFP/Getty Images

Ireland’s finance minister Paschal Donohoe talks with Cypriot finance minister Harris Georgiades and president of the European Investment Bank Werner Hoyer. Photograph: John Thys/AFP/Getty Images

 

It’s not only the member states who are represented in the Brexit talks by the European Commission team led by Michel Barnier, but the EU institutions too.

They include European Parliament, whose representatives are in as close daily touch with the Barnier task force as are the Irish diplomats here, and, at one further remove, institutions such as the nuclear safety agency, Euratom, and the EU’s own bank, the European Investment Bank (EIB). Like the member states, although they may each have their own special interests, they are not permitted to negotiate bilaterally with the UK.

That’s fine when their interests and perspectives on the talks are as one with the 27, or “in lock step”, as one diplomat put it to me about the Irish position. You would be hard put to find a scintilla of a gap between the two positions.

But what happens later in the process, when a political interest in reaching a settlement becomes an over-riding imperative for the 27 capitals, weighing more heavily in the balance than the merits of an individual state’s or institution’s interests? That must niggle at the back of minds in Dublin.   

And take the theoretical case of the EIB. The nonprofit, long-term lending bank whose shareholders are the member states is now the world’s largest international public lending institution. It uses its financing operations to support European economic integration and social cohesion, investing just 10 per cent outside the EU.

Over the past five years (2012-2016) for example, the bank has invested €3.7 billion in the Irish economy, €512 million in support of universities. It is currently preparing another round of major loans to Ireland and has been discussing the possibility of assisting businesses affected by the asymmetric shock of Brexit.

And in the past decade it has lent more than £40 billion to UK hospitals, railways, wind farms, universities, social housing and a string of other projects including the huge London rail expansion, Crossrail. Eight per cent of the bank’s assets are invested back into Britain.

But the UK is leaving the EU, and so is legally required to leave the EIB. The bank has said it will consider changing its rules to allow the UK to stay, but the latter has shown no inclination to do so, and there is one powerful political reason to leave that will probably trump all others – in the calculation of  the huge and controversial UK “financial settlement” or divorce bill, the EIB represents by far the largest shared asset to counterbalance against liabilities.

Leaving makes no sense

Never mind the economic arguments and the UK investment projects in the pipeline. The bank’s president, Werner Hoyer, points out that unlike other large EU states, Britain has no national investment bank and “relies heavily” on EIB funding for investments in infrastructure and other projects. Leaving simply does not make sense (but then nor does Brexit).

Agreeing a UK rebate will not, however, be easy. EIB shares are not traded and it does not issue a profit – so a market valuation is not possible.

Of the €243 billion of subscribed EIB capital, only €21 billion is paid in. The rest, specific pledges to stand by the bank from national capitals including London, would only be forthcoming if necessary. But the UK’s share of the paid-in capital is 16 per cent, or €3.4 billion. That, the Barnier paper on the financial settlement endorsed by the 27 suggests, would be an acceptable rebate, paid down gradually as the bank recovered loans.

No way, says London, albeit so far unofficially. A committee of the House of Lords argues that a “a more useful measure” would be the UK’s share of the bank’s equity, reserves and profits (known as the bank’s “own funds”). According to its latest accounts the EIB had net worth of €66.2 billion at end 2016 and it has been posting annual profits of about €2.7 billion. By Brexit Day (March 29th, 2019) the UK’s share of net worth or “own funds” should be at least a whopping €11 billion.

Talks on the issue have yet to start. 

Clearly €11 billion would go a hell of a lot further than €3.4 billion to reduce the UK divorce bill from the politically difficult €60 billion the commission is believed to be looking for. A reduction of that order would clearly be in the interests of both sides in facilitating a deal.

But sources inside the bank warn that a payment on that scale could severely damage the bank by undermining its AAA credit rating, crippling its ability to borrow cheaply on the markets. And to lend. It’s not just that the bank would shrink, but it could be fatally wounded, and require heavy recapitalisation by the remaining member states to survive.

The short-term imperative of acceding to UK requests for a bonanza payout from the bank to ease agreement on the financial settlement could, some bankers fear, set the 27 at odds with their own very essential bank.

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