Werner Hoyer’s job is to turn Mario Draghi’s delphic pronunciations on monetary policy fixes for Europe’s economic ailments into reality on the ground.
The president of the European Investment Bank (EIB) sat in the Bundestag for 24 years for Germany’s liberal Free Democrats (FDP) and has authored a standard textbook on microeconomic theory: With that background, he’s naturally no fan of keeping the taps of public funding open a minute longer than necessary.
But until the economic conditions and regulatory framework make private investors feel empowered to take over, the former deputy foreign minister is well aware of what the EIB — or ‘the bank,’ as staffers like to call it — has to deliver.
“We live in times when the impact of monetary policy onto the real economy is weak,” 64-year-old Hoyer said in an interview. “And I don’t have the impression that this will change anytime soon; we are almost at the point where this impact is nil. It’s no longer enough to take the horse to the water, you must make sure it drinks.”
It is a huge undertaking. Some five years after the first Greek crisis, and 18 months after ECB president Draghi’s pledge to do “whatever it takes” to preserve the common currency, Europe’s banks are still reluctant to lend to companies even though, as Hoyer puts it, “the economy is awash in money.”
“But even if liquidity is not the problem, money still does not find its way to the real economy. Many investors shy away from projects partly because of strict and sometimes contradictory regulatory requirements. There is a market failure in investors’ risk-bearing capacity.”
“The bank is the last untapped treasure in the history of European integration” — Werner Hoyer.
This is where European Commission President Jean-Claude Juncker’s public-private investment scheme comes in: It aims to leverage $21 billion of its own capital into €315 billion of investment, by guaranteeing investors’ first losses, to fund projects over three years that will help put the EU economy on the road to lasting recovery.
If achieved, it will be by far the largest public-private investment scheme Europe has ever seen. As of now, one year after the European Fund for Strategic Investments proposed the first projects and a few months since the institutional setup was finalized, the Juncker plan has triggered investment of roughly €60 billion, Hoyer said.
Werner Hoyer (L) and European commissioner in charge of Economic and Financial Affairs Pierre Moscovici (R), during a Finance Ministers meeting at the European Council headquarters in Brussels, Belgium, February 12 2016. | Olivier Hoslet/EPA.
Such financial engineering is more often the territory of hedge funds rather than a public-sector bank, and Hoyer acknowledged it had been “harder than we imagined” and that the €315 billion goal was “very ambitious.”
“We’ll only be able to assess whether the leverage worked as we wanted it to at the end of the three-year period. If we look at what we’ve achieved so far, I can say that it seems to be working well.”
However, he knows it could work better — and has taken a twin-track approach to ensure that it does; on the one hand raising awareness of the EIB’s functions and its size among its European stakeholders, and at the same time trying to convince the same people — Europe’s leaders — not to interfere in how the bank does its job.
“The bank is the last untapped treasure in the history of European integration. It has grown to gigantic size, it’s 2 1/2 times as big as the World Bank, but some shareholders don’t know that. That cannot be. One has to tell them,” Hoyer said.
Since he took up the job in 2012, Hoyer has dedicated lots of time to promoting the work of the EIB in the European Parliament and national parliaments. Four years into his six-year term, he has now turned to telling the 28 EU countries who own the Luxembourg-based EIB what he needs from them to do its job.
First up is regulation: authorities tightened rules for banks and insurance companies after the financial crisis to ward off future instability. But did they go so far that lending has been hindered?
“I wouldn’t exclude that sometimes too much has been done,” Hoyer said. For instance, Europe “tried to get on the U.S. bandwagon” of securitization — the bundling of loans into repackaged financial instruments that can be sold to investors — and bungled it. Hoyer said this destroyed or limited the beneficial impacts of an instrument that is designed to redistribute risk.
“When European banks were in trouble, it was because they had taken part in the American game but not because of what happened over here,” he said. “As a result, now in securitization we need a fresh start in Europe. We must have the courage to adapt legislation where it went too far over the past two years.”
The EIB president said governments seemed willing to take a new look at this issue. European Commission Vice President Jyrki Katainen, who is responsible for the Juncker plan, said last week that tougher regulation and capital requirements introduced after the financial crisis were “meant to prevent market failure, but also limited lending to risky, innovative projects.”
“A public bank needs to justify what it does” — Hoyer.
In other sectors too, regulation and competition rules designed in a specific environment can, over time, “become inappropriate and hinder (the economy) today,” he said.
Change, the EIB chief said, “happens too slowly” and needs to be accelerated — and Frans Timmermans, the first vice president of the European Commission and owner of the ‘Better Regulation’ portfolio, “is exactly the right man for it.”
Hoyer’s second piece of advice to the EIB’s shareholders: Don’t overwhelm us, and stop talking about a second Juncker plan before the first one is anywhere near completion. While Juncker himself said the plan could extend into a second three-year period, the EIB chief said it “might not be necessary. We have to wait and see.”
“The framework for many decisions that we are taking is changing fast, and so are the markets. By 2018, we’ll have a better view, including for example of how interest rates and commodity markets develop.”
Regarding the EIB itself, Hoyer said that as a fan of financial rigor, he was “not keen on growth for its own sake.”
“A public bank needs to justify what it does,” he said. “We need to preserve our ability to become smaller again and we are very cautious in adding structures and potential areas of operations.”
However, in the immediate term the scope of the EIB’s activities is likely to expand into new areas. European Council President Donald Tusk asked Hoyer be prepared for next week’s EU summit, when leaders again discuss how to cooperate with Europe’s neighbors on controlling the flow of refugees and providing aid to Syrians displaced by the war.
“I sense there might be a call for action for the bank, to build schools and hospitals in Syria’s neighboring countries, for example,” said Hoyer, adding that the EIB was ready for the challenge — as long as the politicians give him a clear mandate and the freedom to find and finance projects according to the bank’s own criteria.
Florian Eder writes Morgen Europe, a daily German-language brief on European politics and policy.