Munich Personal RePEc Archive

The European Investment Bank as a force of Paneuropean integration:the case of South-Eastern Europe

Kavvadia, Helen (2001): The European Investment Bank as a force of Paneuropean integration:the case of South-Eastern Europe. Published in: Conference Proccedings, International Conference: Restructuring, Stability and Development in Southeastern Europe. The South and East European Development Center (SEED), University of Thessaly,Volos, (1 June 2001)

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South-Eastern Europe has experienced falling or stagnant economic activity in the past decade. War and civil unrest, and the geographic characteristics of the region have been clearly one of the main reasons. A further key element of the economic stagnation, however, is the low level of saving and investment in the region. These are respectively only one-half and two-thirds of the figure seen in the more successful transition economies in Central Europe. Without hinting that the low level of savings and investment is necessarily the determining factor behind the poor economic performance in the region, being a financing institution, the EIB will concentrate on the latter. Following a sharp initial decline in output at the outset of this decade, many countries in South-Eastern Europe have failed to show the kind of rebound observed in the more successful transition economies. When compared with the more successful transition economies, and indeed with other fast-growing middle income countries, South-Eastern Europe has a very low investment ratio, mainly due to low domestic saving.

The best means of raising private saving and investment levels in this environment is to raise corporate profitability. Corporate saving -- the internal financing of corporate investment from retained earnings – overcomes the problem of low household saving rates, dysfunctional financial intermediation and lack of credit risk information.

This is the crux of the matter: inducing higher growth requires raising investment, both in physical capital (infrastructure) and human capital formation (health, education, etc).

Although, such deficits (which incidentally are a normal feature of economies which are trying to catch up or ‘converge’ with higher living standards elsewhere) are not sustainable if largely financed by debt-creating capital flows, the European Investment Bank, as the EU bank, able to provide better lending conditions than what local economic agents, including Governments, would be able to obtain on the market, has played a key role in the region’s reconstruction and development.

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