1. European Economic and Social Committee
EUROPEAN INDUSTRY AND MONETARY POLICY The role of the European Investment Bank (EIB)
PRESENTATION OF THE PROJECT
DRAFT (To be updated) Nov

2. Main goal of the Project
.. Explore how to improve the efficiency of European monetary policy in its impact on industry and real economy, mainly through the collaboration between the European Central Bank and the European Investment Bank.

3. Main goal of the Project
.. The main purpose of this project is to collect, elaborate and disseminate information on the legal, technical and economic feasibility of different mechanisms of cooperation between the Eurosystem and the European Investment Bank (and National Promotional banks and agencies) as a potential way of improving the efficiency of monetary expansion in the Eurozone. 3

4. Main goal of the Project
.. Our goal is economic/productive, not institutional
.. Any idea or proposal to increase efficiency of monetary expansion can be of interest.
.. Even the involvement of the EIB is a tool, not the ultimate goal by itself. 4

5. Monetary expansion
EIB know how could be useful in improving efficiency of ECB policies, that impact economy through:
.. Key interest rates
.. Expansion of Eurosystem Balance Sheet
Monetary expansion is achieved in an indirect way, channeling liquidity to the banking system.
Involving the EIB could ensure that key interest rates and monetary expansion impact as directly as possible in real economy. 5

6. EUROSYSTEM CONSOLIDATED BALANCE SHEET 2008 – 2015 (million EUR)
Monetary expansion
Quantitative monetary expansion has evolved in an irregular but clearly expansionary way during the financial crisis.
EUROSYSTEM CONSOLIDATED BALANCE SHEET 2008 – (million EUR)
Source: ECB/Saxo Group 6

7. Monetary Expansion is not only a matter of financial crisis expansionary programmes
EUROSYSTEM CONSOLIDATED BALANCE SHEET 1999 – 2008 (million EUR)
Source: ECB/Depth Dynamics 7

8. CENTRAL BANKS BALANCE SHEET AS A % OF GDP (2000-08)
Monetary Expansion is not only a matter of financial crisis expansionary programmes
.. The main objective of the Eurosystem - Keeping inflation below but close to the 2%- means that, in the long term, monetary expansion will increase over the GDP increase rate.
CENTRAL BANKS BALANCE SHEET AS A % OF GDP ( )
Source: ECB / FED / Hinde Capital 8

9. Monetary expansion: Effectiveness and efficiency
.. The economic debate about monetary expansion operations has so far focused mainly on the effectiveness of those strategies. Various data have been provided on the results achieved by QE regarding credit, growth, unemployment, etc.
.. While supporters of monetary expansion / QE defend the effectiveness of these operations, using the U. S. case as an example, critics question those results.
.. However, for the purposes of this study we are not interested in the effectiveness of monetary expansion, but in its efficiency, in other words the relationship between the results obtained and the resources used. 9

10. Main goal of the Project
.. Anyway, as we will explain throughout this presentation, our aim is not to analyse or assess the overall effectiveness or efficiency of such monetary expansion operations, but only to examine the feasibility of specific adjustments being introduced to improve the efficiency of the transmission mechanisms of the monetary policy, through different collaboration options between the ECB and the EIB. 10

11. Overall risk level of the EU Institutions
.. We don´t pretend to interfere in the debate about the overall risk level of the EU Institutions.
.. Our research pretends to ensure that monetary expansion risk is more related to real economy -and, so, more efficient- without increasing the overall risk of the Eurosystem. 11

12. Overall risk level of the EU Institutions
.. So, the ECB-EIB collaboration should be articulated through mechanisms that do not increase the overall risk of the Eurosystem consolidated balance sheet.
.. As opposed to that, increasing the efficiency of monetary expansion implies:
Achieving similar results with lower resources and risk
Achieving better results with similar resources or risk 12

13. Expanded Asset Purchase Programme 2015-2016
On 22nd January 2015, the European Central Bank announced a new phase of monetary expansion, basically justified by the fall in inflation rates in the eurozone to below the target set by the ECB itself, namely lower but close to 2% annually.

14. Expanded Asset Purchase Programme 2015-2016
In fact, both the minutes of the meeting of the Governing Council of the ECB and the public statements of the Bank´s representatives repeatedly mention both price stability and the impetus provided by bank credit to growth or economic recovery as main reasons for this quantitative expansion programme.

15. Expanded Asset Purchase Programme 2015-2016
This programme, which began in March at a monthly rate of EUR million and will last “at least” until September 2016, will be implemented through the acquisition of financial assets.
So, “at least” it will reach 1,14 trillion EUR (As a reference: more than 50 times the EC Investment Plan for Europe or Juncker Plan).

16. Juncker Plan and Long Term Monetary Programs

17. Juncker Plan and Long Term Monetary Programs
ECB APP PLAN IS 55 TIMES BIGGER THAN JUNCKER PLAN
The 3 long term monetary programs of the last years are 121 TIMES bigger than Juncker Plan
What’s happening here?
In both cases, we are speaking about public resources channeled to the EU economy.
Is there no relationship between both of them?

18. Expanded Asset Purchase Programme 2015-2016
Whereas the monetary expansion through LTROs and TLTROs launched by the European Central Bank from 2011 took the form of loans to the banking sector, the programme now approved by the ECB is based on acquisition of:
– asset-backed securities;
– covered bonds;
– securities issued by governments and agencies of the eurozone and supranational institutions. 18

19. Expanded Asset Purchase Programme 2015-2016
.. In this Programme, monetary expansion takes place through the purchase of assets and not through loans to financial institutions. This does not alter the fundamental concerns about the extent to which monetary expansion reaches the real economy.
.. Even though it should be easier for public and private entities to place new issues of securities while the programme lasts and they are beneficiaries of it, the main and fundamental effect of the programme is to provide liquidity to the financial institutions from which the securities are purchased. 19

20. Expanded Asset Purchase Programme 2015-2016
.. The European Central Bank has also insisted that the aim of new acquisitions of public debt is not to provide debt financing for the Member States but rather to inject financial resources into the European economy through general expansionary monetary policies.
.. It looks very clear that the main beneficiaries of the Programme are not the entities issuers of the assets but the banking system as owner of the assets purchased. 20

21. Expanded Asset Purchase Programme 2015-2016
.. Thus the problem is similar to the one described above: namely to what extent this liquidity provided to financial institutions is either transferred to the productive economy, or remains stuck in financial institutions or is reinvested in speculative activities outside the Eurozone.
.. The aim of supporting the productive economy through monetary expansion is therefore the same under this programme as in the framework of long-term refinancing operations (LTRO) in and “Targeted” LTROs in 21

22. ASSET PURCHASE PROGRAM 2015-2016
Long Term Programs
LTROs
TLTROs
( )
ASSET PURCHASE PROGRAM
1 trillion € (10% / Eurozone GDP)
- Loans to European banks
Term: 3 years
Rate: 1%
0,4 trillion € (4% / Eurozone GDP)
Loans to European banks - Term:
.. 4 years conditioned to increasing credit
.. 2 years with no conditions
“At least”, 1,14 Trillion €
(11% / Eurozone GDP)
- Public and private securities 22

23. The case of the targeted TLTROs
During 2014, the ECB launched a “targeted” program: LTROs, based on loans provided to banks with the condition of an increase in the loan stock of the bank
400 million have been channeled to the banking system through this programme.
The “targeting” goal of this program is limited.

24. The case of the targeted TLTROs
There is no “targeting” for two years financing
Only if banks want to keep the funds after , then they must respect the “targeting” requisites.
For half of the loans to banks (200 Million) the only requisite is to increase the net financing, without any specific amount
So, it´s not strange that, according to the ECB July 2015 Survey, only 56% of this financing seems being channeled to credit.

25. SOURCE: ECB. BANK LENDING SURVEY JULY 2015
The case of the targeted TLTROs
SOURCE: ECB. BANK LENDING SURVEY JULY 2015

26. The case of the targeted TLTROs
So, according to the ECB Survey, even in this “targeted” program:
.. 25% is being channeled to “refinancing” of the banks
.. 19% to assets buying
.. only 56% is channeled to credit

27. The case of the targeted TLTROs
Anyway, the TLTRO program may be a very good conceptual reference:
establishing conditionalities to ensure the link with the real economy is not incoherent with Eurozone monetary policy

28. Expanded Asset Purchase Programme 2015-2016
We believe this is a key moment for European public- and private-sector stakeholders –in particular European industry represented by the EESC- in terms of defending the interests of industry and the real economy in the face of this programme, which will amount to at least 11% of Eurozone GDP.

29. Indirect nature of monetary expansion
The main problem with monetary expansion is its lack of focus. Except –in some way- in the TLTRO operations, funds are provided to banks and it´s up to the banks to decide if these funds are or not invested and, if so, if they are invested in or out of the Eurozone and in productive or speculative activities.

30. Indirect nature of monetary expansion
.. In monetary expansion, central banks do not finance the real economy directly, but through the financial sector, either through key interest rates, through loans to financial institutions or through liquidity provided by acquiring financial assets held by them.
.. By providing liquidity to the financial sector, it is hoped that banks will redirect that liquidity into the real economy, boosting credit, investment and aggregate demand.
.. But –with the TLTRO exception in some way- no conditions are required to the beneficiary banks so as to make sure that the resources provided attend the real economy. 30

31. Indirect nature of monetary expansion
.. We believe that, in the current environment, only channeling these funds towards productive investments – and generally speaking the real economy – would justify this undertaking. 31

32. Indirect nature of monetary expansion
.. There are differing opinions about the extent to which the banking sector will redirect the resources obtained through monetary expansion into local economic activity. However, it is generally accepted that this redirection is only partial.
.. It seems that a significant proportion of the resources generated through monetary expansion remain stuck on bank balance sheets, are invested outside the territory or are channelled into speculative bubbles. 32

33. Indirect nature of monetary expansion
.. In response to bank credit contraction and financial instability since the outbreak of the financial crisis, earlier monetary expansion programmes have provided more and more liquidity at key interest rates for European banks.
.. This is an important objective in itself, but there are significant doubts as to how much of this stimulus has reached industry and the real economy. 33

34. Indirect nature of monetary expansion
.. It is important now to ensure that the direct or indirect support to the banking sector – through direct financing or acquisition of debt currently held by banks – is submitted to the necessary changes to maximise its impact for industry and productive investment.
.. In other words, we believe it is important to ensure that this monetary expansion as far as possible is allocated to financing Europe's productive economy. 34

35. A more focused monetary expansion
.. The basic purpose of this project is to examine the extent to which this objective of financing the productive economy can be realised through collaboration in the implementation of monetary expansion policies between the Eurosystem and entities specialised in lending to the productive sector, which at EU level means above all the European Investment Bank (EIB).
.. This would obviously not encroach on the competence of the European Central Bank with regard to the objectives and the amount of monetary expansion. 35

36. A more focused monetary expansion
This involvement of the EIB should further four basic objectives:
a) making the transmission mechanism of monetary policy more efficient in terms of its direct connection with the real economy;
b) establishing a more direct relationship between monetary policy, money supply and price stability;
c) establishing a more direct relationship between money supply expansion and increasing productive capacity;
d) providing more resources for policies to promote investment in the eurozone. 36

37. The role of the EIB
In theory, there may be different ways to make monetary expansion more focused in real and productive economy.
But, from our point of view, the collaboration with the European Investment Bank is a practical, realistic and feasible way of achieving this goal in an efficient way.

38. How to involve the EIB expertise
We can visualise different potential operational options:
.. establishing some kind of systematic advice from EIB on the allocation of resources generated through monetary expansion.
.. loans from the Eurosystem to the EIB
.. acquisition by the Eurosystem of securities issued by the EIB
.. setting up a fund held by the Eurosystem/ECB, but managed by the EIB
.. setting up a fund of entity managed –and owned- by the EIB 38

39. The role of the EIB
The European Investment Bank is probably the key institutional locus of know-how about policy on investment in the productive economy for the purposes of the European Union. . 39

40. European Investment Bank (EIB)
.. Annual lending 2014: 80.3 bn €
.. Consolidated capital 2014: 243 bn €
.. Geographical scope: EU (90% of funding) and other countries (10%) 40

41. European Investment Fund
.. Fund managed by the EIB
.. Ownership: EIB (majority shareholder) / European Commission / Public and private financial institutions.
.. Capital: m €
.. Main objective: Venture capital for small and medium enterprises. 41

42. EUROPEAN INVESTMENT BANK EUROPEAN INVESTMENT FUND
EIB. Credit Rating
EUROPEAN INVESTMENT BANK
Fitch
Moody’s
Standard & Poor’s
Long term
AAA
Aaa
Short term
F1+
P-1
A-1+
EUROPEAN INVESTMENT FUND
Fitch
Moody’s
Standard & Poor’s
Long term
AAA
Aaa
Short term
F1+
A-1+ 42

43. If necessary, EIB also works through banks
BREAKDOWN OF OBLIGORS 2013
Source: Fitch / EIB. Based on the ultimate obligor 43

44. DEGREE OF PROTECTION IN CREDIT TO BANKS 2013 Source: Fitch
EIB also knows how to work with banks in a very secure way:
DEGREE OF PROTECTION IN CREDIT TO BANKS 2013 Source: Fitch 44

45. The role of the EIB
.. Aside from regulatory considerations, the European Investment Bank would seem to be an ideal repository of the know-how required to redirect to the real economy the resources generated by monetary expansion.
.. Its objectives, as defined in Article 309 of the Treaty on the Functioning of the European Union, ensure the general interest of its activity. 45

46. The role of the EIB
.. Its activities are clearly focused on innovation, training, industrial investment, access to funds for small and medium-sized enterprises, and investing in energy and infrastructure. This is exactly what Europe needs, and more urgently than ever.
.. If we look at the usual beneficiaries of European Investment Bank (EIB) operations during the period , it is clear that industry, energy and transport are the main priorities of EIB activity: 46

47. 47

48. 48

49. The role of the EIB
.. We can see that investments are related directly (industrial sectors) or indirectly (energy, transport, telecommunications, etc.) to industrial activity.
.. For the "industrial sectors" category, financing provided during the reference period is further broken down as follows: 49

50. 50

51. 51

52. The role of the EIB
.. The EIB's experience with redirecting financial resources to the real economy is self-evident.
.. By the same token, EIB involvement in managing resources generated by monetary expansion could also be an appropriate tool for ensuring that those resources are channelled to industry, infrastructure, technological investment, SMEs and to the real and productive economy in general,...
.. This way, we could ensure that the Eurozone institutions serve the general interest, which ultimately is the main goal of both the Eurosystem and the EIB. 52

53. Starting point .. Main questions have to be answered: CAN IT BE DONE?
HOW?
IN WHICH AMOUNT?
WHEN?
.. Our position / goals are being adapted as the Project goes on, according to the positions of the European stakeholders, EU institutions, technical issues, … 53

54. Main steps .. Preliminary Draft (February 2015)
.. Decision of the EESC Board (march 2015)
.. Presentations on “Some Basic Concepts “ and “Main Issues” (march 2015)
.. First contacts with EIB and ECB (march 2015)
.. Checking with experts in different EU countries (april 2015):
70 experts checked
At the moment, 37 answers 54

55. Main steps
.. Four main power point presentations (to be continuously updated) (may 2015):
- PRESENTATION OF THE PROJECT
- POLICY ISSUES
- LEGAL AND TECHNICAL ISSUES
- MAIN PROVISIONAL CONCLUSIONS 55

56. Main steps
.. Next steps:
- Small presentations with stakeholders in Brussels.
3 local events (Vilnius, Bilbao, …)
Brussels Round Table: November 12th 56

57. Main premises
One of the major barriers to increasing the efficiency of monetary expansion policies is the indirect nature of their transfer to the real economy, which is achieved by injecting liquidity into the banking system, either through loans to financial institutions or acquisition of assets owned by those institutions.
But –with, in some way, the TLTRO exception- banks are not subjected to conditions that ensure the correct destination of the funds. It is hoped that financial institutions will move this liquidity into the real economy, but this happens only partially. 57

58. Main premises
B. The EIB is the EU institution that has the know-how and the tools that are specifically designed to channel credit to the real economy (infrastructure, SMEs, etc.) 58

59. Main premises
C. The main hypothesis of this Project is that structural collaboration between the Eurosystem and the European Investment Bank – or national promotional banks or agencies- would be an excellent tool for significantly improving the efficiency of monetary expansion operations in the Eurosystem, maximising efficiency at their final destination, the real economy. 59

60. Main premises
D. As said before, this collaboration could be achieved through:
 .. Involvement of the EIB or / and of national promotional banks or agencies from member states.
.. Involvement of the EIB could be in a substantial part of the monetary expansion or in a limited amount. 60

61. Main premises. Some options
 .. Transferring resources to the EIB balance:
Directly: ECB loans to the EIB
Indirectly: Purchase by the ECB of debt issued by the EIB
.. Without transferring resources to the EIB balance:
- Setting up a Fund managed by the EIB but under the Eurosystem / ECB ownership
- Setting up a Fund –or an entity- managed and owned by the EIB
- Making use of the EIB expertise through advice, formal reports or delegation in allocation of resources. 61

62. Main premises
F. This involvement of the EIB should be compatible with the objectives of monetary expansion, namely:
.. to increase money supply;
.. to support price stability and economic recovery. 62

63. Main premises G. This involvement of the EIB should be a way to:
Achieving similar results with lower resources or risk
Achieving better results with similar resources or risk 63

64. Thank you for your attention