European Bank for Reconstruction and Development

An Introduction to the Foundation and Operation of the EBRD

Oct 4, 2009

The European Bank for Reconstruction and Development (EBRD), a multilateral international financial organisation, was established May 29, 1990.

Intended as a mechanism for providing financial and structural assistance to the states of Central and Eastern Europe emerging from the shadow of communism, the EBRD is wholly owned by its member countries, along with the European Community (EC) and the European Investment Bank (EIB), and their voting power is determined by the number of shares that they hold. The subscribed capital of the EBRD totals 20 billion euros, although only 5 billion euros is fully paid-in and the Bank does not use these funds to directly finance its loans. Instead the sound financial base that this affords the EBRD earns it top credit ratings from agencies such as Moody’s and Standard & Poor’s and enable it to borrow extremely competitively on the international financial markets.

The Structure of the EBRD

The U.S. is the EBRD’s largest shareholder, with a capital subscription of 2,000 million euros and 10% share of voting rights, followed jointly by Japan and major European powers France, Germany, the U.K. and Italy with an investment of 1,703.5 million euros. The member states of the European Union in conjunction with the EIB possess a simple voting majority, which means that ‘Europe’ as a single entity can in theory take some decisions without the agreement of the U.S., which at the creation of the EBRD served to reinforce its European element, and that it was a Western European initiative to aid Eastern Europe. Although more important decisions, principally the allocation of loans to recipient countries, require qualified majority voting up to a maximum of 85% which means that the U.S. can block loans to what it considers unsuitable countries with relative ease.

The Creation of the EBRD

The negotiations that led to the creation of the EBRD were fraught with difficulties, chiefly due to American objections to the creation of a new intergovernmental development bank in which it was clear from the outset that it would not be able to command the same sort of influence as it does in the World Bank and the IMF, and in which (perhaps a greater problem) the Soviet Union was to be included. The United States was also concerned by the fact that a majority of European countries believed that it was important to allocate loans to the public sector of recipient states as well as to private enterprises.

The U.S, and also the United Kingdom – once more out of step with her European neighbours – worried that an.y allocation of loans to the public sector of states whose economies had suffered decades of socialist central planning and in which all important industries were wholly state-owned, would be seen as propping up moribund sectors of the economy. After intensive negotiations the Anglo-American camp prevailed and it was agreed that a majority of the Bank’s capital would be directed towards the private sector.

Another bone of contention for the United States was the question of Soviet involvement in the institution. In the first instance the Americans fought against Soviet membership on the grounds that it viewed the EBRD as a lending vehicle for Central and Eastern European (CEE) states that were committed to moving towards democracy and a market economy, something that it believed the USSR could never achieve. However, when all the European members – including the United Kingdom – insisted upon Soviet membership, America backed down.

The U.S. did, however, manage to obtain some concessions from the European camp, and the Soviet Union was consequently denied the same lending rights as the CEE states, which meant that it would be unable to borrow beyond its share of the Bank’s capital. This decision had less to do with dogmatic American opposition to any Soviet receipt of EBRD funds, and more to do with a pragmatic realisation that the Soviet economy was effectively a bottomless pit that could potentially use up a majority of the Bank’s funds leaving the CEE states with little investment.

Operations of the EBRD

After a slow start the EBRD played an important role in aiding the move towards privatisation of key state-owned industries in Central and Eastern Europe and in promoting the development of small and medium-sized enterprises. In the first instance the EBRD invested heavily in both Hungary and Poland in conjunction with the European Union’s PHARE programme.

Given that the principal remit of the EBRD is to invest in the private sector of its recipient countries it is perhaps a little surprising that it waited until 1999 before launching a lending instrument dedicated to fostering the growth of privately owned enterprises. The SME (Small and Medium-sized Enterprises) Finance Facility# is a joint EU/EBRD initiative that was specifically created to provide investment such businesses in the EU accession states of central and eastern Europe. Through this lending facility the EBRD and the EU typically provide loans of not more than 100,000 euros, which means that, given that the fund totals 846 million euros means that there is the potential to really energise the private sector.

In addition to this initiative the EBRD began, in early 2004, to outline its strategy for ‘Early Transition Countries’ (ETC’s) which are the seven poorest countries that fall within its sphere of operations: Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan. In casting its net far wider than its original remit imagined the EBRD is making an attempt to redefine its field of operations and therefore maintain its relevance alongside more powerful IMO’s (International Multilateral Organisations) such as the IMF and the World Bank, and seems to be mirroring the eastwards spread of the European Union.

Taking this last point into account, it seems almost natural that the EBRD should invest in these former Soviet republics, to prepare these countries for a closer political and economic integration with Europe, if not some form of association with the EU.

BRONSTONE, Adam “The European Bank for Reconstruction and Development”, Manchester University Press, Manchester, 1999.

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