The European Investment Bank (EIB) could move one step closer to loosening its lending criteria to unlock more direct investment into defence as soon as Thursday (21 March), when it expects to get the final signal it needs from the EU’s 27 member states, Euractiv understands.
The EU’s lending arm is preparing to put forward a concrete action plan to “stretch” its investment remit beyond its current dual-use definition as EU leaders – meeting on Thursday and Friday to decide their highest-ranking policy priorities for the next three months – look poised to give it the formal mandate to do so.
According to a set of preliminary conclusions seen by Euractiv, which are yet to be finalised and debated upon, heads of state and government may ask the bloc’s investment bank to “adapt its policy for lending to the defence industry and its current definition of dual-use goods”, – adding to similar moves by EU co-legislators over the last month.
“If after Friday, [the EIB] has the Parliament, the Commission and now the Council saying ‘Go beyond dual use’, then it has to come forward with a proposal”, a source close to the matter told Euractiv on Monday.
“Thursday will be crunch time, and it will act on the wording of the Council,” the source said.
An early indication that EU leaders may ask the EIB to invest in core defence products came from a letter signed by 14 member states on Monday, which urged it “to explore different possibilities […] beyond existing dual-use projects.”
“This would mean discussing and re-evaluating current definitions of dual-use projects and the list of excluded activities as well as reconsidering its defence industry lending policy and other restrictive elements,” the letter, first reported by the FT, said.
The signatories were led by Finland and included heavyweights France and Germany, as well as Bulgaria, Czech Republic, Denmark, Estonia, Italy, Latvia, Lithuania, the Netherlands, Poland, Romania and Sweden.
Three options on the table – And nothing is off
The EIB would be looking into three different scenarios for amending its traditional lending remit, not ruling out the more markedly hawkish one of rotating into direct funding for ammunition and weapons.
The most conservative option that it could present would remain within the perimeter of the dual-use definition – which implies that the Bank continues to invest in projects that can have a double civilian- and military- application leans towards the latter.
The source pointed out that the portion allocated to military use could reach “theoretically, even 90% against 10% of civilian use” and could target, within the former category, smaller European companies that focus purely on military products and services.
This option would be the easiest to achieve, as it would not alter the Bank’s dual-use statute or its current list of excluded activities—i.e., the sectors in which it is not allowed to invest. Currently, “ammunition and weapons, including explosives and sporting weapons, as well as equipment or infrastructure dedicated to military/police use” feature in this category.
The second option would go beyond dual-use projects, widening the Bank’s investment remit to “defensive military assets”—including cybersecurity, radars, satellite technology, infrastructure and equipment, “and anything that doesn’t imply lethal risk.”
The EIB is understood to be “leaning towards” this strategy, which would also mean “the Bank could remove the general exclusion of military infrastructure,” the source added.
According to the source, changes could be approved by a simple majority—representing at least 14 of the member states and accounting for at least 50% of the capital.
Coincidentally, the signatories of Monday’s letter would meet that condition, which accounts for around 76% of the Bank’s capital base, according to an independent banking watchdog source.
However, if EU leaders deem them “not satisfactory” and call for a more robust shift, the source said the EIB will go back to the drawing board and develop proposals that include them.
“EU leaders and finance ministers are ultimately its bosses.”
Raising capital like it’s 2014?
Meanwhile, the EIB will present the two ‘less disruptive’ scenarios to the meeting of EU finance ministers on 12 April, shortly before the Bank’s president, Nadia Calviño, is due to report to them on possible pathways forward. This follows ramped-up pressure from the bloc’s defence ministers on their financial counterparts to reduce hurdles to defence investment.
In an internal paper dated 11 March and seen by Euractiv, outlining the EU investment bank’s strategic priorities to remove such roadblocks, the lender mentions an important factor that may constrain its ability to expand into direct defence investment—its so-called gearing ratio—and thus possibly get in the way of legislators’ plans.
This represents the maximum leverage the Bank can take on—€90-95 billion of new loans annually, which allows it to maintain a stable leverage-to-capital ratio—but these loans should be targeted at projects related to developing the EU’s internal market and, specifically, its less struggling regions.
This would entail that, if legislators want the EIB to step up its lending to also invest into defence, it will need to breach above that annual level.
While the first route to achieve that—hiking the Bank’s statutory leverage threshold—may not be seen as feasible, the Bank could instead return to the markets to raise more capital and beef up its capital base.
This only happened during the European sovereign debt crisis under the Juncker Plan. At the time, the bloc’s 27 member states – representing the EIB’s board of governors through their finance ministers – objected to securing new EIB issuance aimed at propping up the bloc’s ailing finances, prompting the then-Commission president Jean-Claude Juncker to ensure the EIB bonds on the EU budget instead.
However, this time around sceptics are voicing concerns that the EIB’s triple-A and solid ESG rating – which allows it to borrow on the markets at very low costs – could be negatively impacted by a potential move into defence assets, which in turn would complicate the backdrop for another emergency-times market issuance similar to that of the Juncker plan
[Edited by Alice Taylor]
