EUROPEAN BANK FOR
RECONSTRUCTION AND
DEVELOPMENT (EBRD)



Headquartered in London, the European Bank for Reconstruction and Development (EBRD) is a financial institution created to further develop capitalist interests in central and eastern Europe. The EBRD has a 23-member board of directors and is run by five vice presidents and one president. The Articles of Agreement for the EBRD were signed on 29 May 1990 in Paris, and the EBRD formally began operations on 28 March 1991.

The EBRD was first proposed by the French government in 1989. Initially, the European Economic Community (EEC) members were not interested in such a bank and some were even opposed to the idea. Despite initial resistance, the French government was able to negotiate an agreement to establish the EBRD within only five months. This compares to nearly three years of negotiations that were needed to establish the World Bank.

The main goals of the EBRD are to promote economic development, market-oriented economies, multi-party democracy, and private entrepreneurial ventures. The EBRD is an organization designed to help the former communist states make the transition to capitalist economies. Members of the EBRD hope that the bank will help develop a strong European economy that brings together both the current western European economy and the growing eastern European economy that is replacing communism.

The majority of the bank's funds are designated specifically for the development of private businesses or the conversion of state-owned firms to private concerns, mostly in the form of loans, equity investments, or guarantees. The ever-shrinking remainder is set aside for the development of much-needed infrastructure projects, such as improved roads and railroads, to better link the newly developing economic centers.

Membership in the bank is open to all European countries, non-European countries who are members of the International Monetary Fund (IMF), the European Community, and the European Investment Bank. There were 60 members in 1999.

The 26 countries of operation were Albania, Armenia, Azerbaijan, Belarus, Bosnia & Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Macedonia, Moldova, Poland, Romania, the Russian Federation, the Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.

EARLY DEVELOPMENT

The bank's first years were not without controversy. Most controversial of all was the first president of the EBRD, Mr. Jacques Attali. Attali, an economist, a former advisor to the French president, and author of 16 books, had no banking background. He was criticized for creating a top-heavy management and for ignoring the interests of the non-EC members of the EBRD. However, the bank owed much of its existence to Attali's passionate views of a strong, unified European economy.

The bank began its lending operations in April 1991. In the first year of operations, the bank loaned approximately $780 million for a total of 19 projects. The initial agreement called for a borrowing limit on the former USSR. This three-year restriction was equal to the USSR's paid-in capital. However, after the breakup of the USSR, members decided that a limit was no longer prudent. Therefore, the majority of the EBRD's funds were disbursed to central and east European nations and the Baltic states.

The EBRD's capital was denominated in European Currency Units (ECU) until the official implementation of the euro on 1 January 1999. In 1997 the bank's capital was doubled to ECU 20 billion (about US$23.4 billion) to keep up with its investment agenda. Project disbursements in 1998 totaled ECU 2.37 billion (US$2.77 billion), while the bank held reserves of ECU 762 million (US$889.56 million). The severe economic crisis of 1997 and 1998 that began in Asia and reverberated through Russia and other areas under the EBRD's jurisdiction resulted in a net loss of ECU 261.2 million (US$304.93 million) for 1998.

The EBRD has fallen under some criticism for continuing to lend in countries, particularly in central Europe, that now can access international capital markets. Such critics complain that EBRD loans may preclude private lenders, thus forestalling these countries' entry into the global financial community. EBRD officials contend that its loans are primarily directed toward industries or businesses that would be passed over by outside lenders, and that a necessary step toward advancement for the region depends on the sound economic policies the bank requires for loan eligibility.

[ Judith A. Zimmerman ]

FURTHER READING:

Barish, Michael, Wei Ding, and Michael Noel. On the Road to EU Accession: Financial Sector Development in Central Europe. Washington: World Bank, 1996.

European Bank for Reconstruction and Development. Financial Results and Financial Statements. London, 1999. Available from www.ebrd.org .

Menkveld, Paul A. Origin and Role of the European Bank for Reconstruction and Development. London: Graham and Trottman, 1991



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