European Affairs

EUROPE MOVES TO REWARD “ARAB SPRING” WITH BIG INCREASE IN DEVELOPMENT AID -- HELPED BY U.S.     Print Email

Europe is moving toward a big expansion in its economic assistance to North Africa in the form of geoffpauldevelopment investments by the European Bank for Reconstruction and Development (EBRD). Starting with Egypt, the countries of “the Arab spring” stand to receive aid potentially amounting to tens of billions of euros from this London-based source.

If this new donor sounds slightly suprising as a lever of change in the Arab world, it is partly that its name is something of a misnomer. To a significant degree, the “EBRD” is, strictly speaking, not “European,” not a “Bank,” and not engaged in “Reconstruction.” Established in 1991 as the first post-cold war international financial institution, it functions as a development agency created to support the emergence of market economies in central and Eastern Europe following the collapse of the Soviet Union. As such, it fits into a global network of similar entities linked with the World Bank. As a major new player in Europe, the London-based EBRD has always been headed by a European, but it has 61 member countries; its funding comes primarily from the EU (both member states and two EU institutions, the European Commission and the European Investment Bank), but it is followed by contributions from the U.S., a founding member of the EBRD.

The new phase in the EBRD’s work involves re-interpreting its mandate in order to be able to play a bigger role in response to developments in Egypt, Morocco, Jordan and Tunisia (and perhaps soon in Libya). These North African countries are now being categorized as qualifying for more investment from the EBRD. This partial shift in the flow of EBRD funds to emerging democracies in North Africa represents a significant step in fulfilling EU officials’ promise to help the “Arab spring.” Even though European leaders initially seemed slow to appreciate and support the revolutionary wave that started in Tunisia and then toppled the regime in Egypt, they did subsequently take the lead in creating the military coalition that ousted the Libyan dictatorship. Now they are taking a major new step in promising aid to the countries on Europe’s southern border across the Mediterranean.

These plans are taking shape in a context that still contains some uncertainties about the scale and format of the aid packages. A big question mark is the on-going European economic crisis and how heavily that situation is liable to weigh on EBRD resources.

But the EBRD is a heavyweight entity. It has more than $50 billion in assets.

While their shareholdings differ widely in value and their membership is divided into financing members and recipient members, all members have equal status within the EBRD and all must agree on any change in statutes or any major investments.

This has been one of the limiting factors in the bank's ability to accede to requests that it extend its area of operations from the former Soviet empire to the Arab Middle East and North Africa. Another major inhibitor has been the bank's absolute requirement that it assist only those countries that are “committed to and applying the principles of multi-party democracy [and] pluralism.” The lack of free and open market economies in recipient countries also acted as a brake on what the bank could do.

It was at a meeting of the G8 leading industrial economies in May – all of them shareholders in the EBRD and one of them, Russia, a major beneficiary – that the EBRD was urged to extend its mandate “in order to support the transition in countries of the [Middle East and North African] region which embrace multi-party democracy, pluralism and market economies.”

The changes under way in that region were “historic and have the potential to open the door to the kind of transformation that occurred in Central and Eastern Europe after the fall of the Berlin Wall. The aspiration of people for freedom, human rights, democracy, job opportunities, empowerment and dignity has led them to take control of their own destinies in a growing number of countries in the region.”

This new focus amounts to a step-change in scale, not an entirely new direction. In May (before the latest troubles in the eurozone, which includes many EBRD financing members), the bank said that, after an initial period, it hoped to invest up to some 2.5 billion euros a year in the Mediterranean and North African region – while maintaining its current level of commitment (almost 9 billion euros) to its existing recipients. It had a good year last year, with a net profit of 1.4 billion euros. (It pays no “dividends” to shareholders: all its income on repaid loans is ploughed back into the EBRD’s capital.)

While virtually all the EBRD members have voted to expand its mandate, in many cases these votes require approval from national governments and that process could take years. So the bank, with the backing of its board of governors including U.S. Treasury Secretary Timothy Geithner, has chosen to sidestep this technicality and move ahead in opening the flow of funds to this increasingly vital region.

Egypt is likely to be the first of the “Arab Spring” countries to benefit from the upgrade and expansion of the EBRD’s financial assistance from Central Europe to the Middle East. An EBRD inspection team has already been to Cairo -- “listening intently”, its spokesman said. Discussions with the Egyptian business community and ministers concentrated on how to stimulate growth, expand employment through small and medium enterprises and encourage fuel efficiency. Similar consultations in Morocco, Tunisia and Jordan are being prepared. (There is a possibility, too, that Libya will be included at some stage, but that country has never been a shareholder in the bank as donor or recipient.)

This being the Middle East, nothing flows simply. A group of Egyptian NGOs has issued a statement implying that, given the vested interests of the major financial powers involved in the EBRD, they doubted whether it can actually “assist in a transition period for the cause of justice, development and peoples' rights.” They questioned whether anything good would come for the people of Egypt from EBRD loans.

Of course, such skeptics do not answer the obvious question as to where else the hard-pressed world economy is going to find spare funds at this time. But EBRD has sought to soothe any such fears in Cairo that the funding might help sustain the failed policies or key personalities of the ousted Mubarak regime. Jon Charles, communications director for the EBRD, told the Egyptian Daily News that “as long as Egypt remains committed to democracy we will remain supportive” in helping see that the country continues on “the right path.”

With a long complex election period due to start in Egypt at the end of November, Charles accepted that a fair amount of chaos was inevitable. “It would be remarkable if there wasn't any turmoil as the country moves towards a post-Mubarak economy,” he said.

If Egypt's pro-democracy activists are concerned about how international aid may be applied, so, too, are the Israelis. EBRD president Thomas Mirow, a former high official in the German Finance Ministry, sought to calm Israeli concerns. “My own perception is that any effort to support the stabilization of Egypt and increase the opportunities for young people could be helpful for Israel, too,” he told the Jerusalem Post, adding: “We have not only an economic but a political mandate. Every taxpayer in Israel [which has a 136 million euro shareholding] can be sure our money will not fund authoritarian regimes or corrupt elements in the [Egyptian] economy.”

The Israelis will be joined by the bank’s other financing partners to make sure the EBRD is as good as his word.

Geoff Paul, Middle East specialist based in London