EU must pull its weight to help create a better global financial system

First published in The Guardian

No one said the fight for a better global financial system would be easy. Last week’s negotiations in the UN’s financing for development (FfD) process, which will lead to a high-level conference in Addis Ababa in July, showed exactly how tough the battle is going to be.

Although the discussion is ultimately about money, FfD is not a fundraising event. It focuses on systemic issues such as illicit financial flows, sovereign debt crisis, private financial flows, trade, investment and global governance. Improving these would greatly contribute to the eradication of poverty and to financing sustainable development.

The world needs urgent change. The report of the high level panel on illicit financial flows from Africa concluded that they “range from at least $30 billion to $60 billion a year”, making Africa “a net creditor to the world rather than a net debtor, as is often assumed”. In the EU, the estimated loss through tax dodging is €1tn per year.

Rather than working together, governments are currently fighting about who gets to decide what should be done. Developed countries insist that the OECD – also known as the “rich countries club” – should be the centre of global tax negotiations. This would exclude more than 100 developing countries from negotiations, while countries such as Luxembourg and Switzerland – a key part of the problem – get to be in the room.

Developing countries are calling for an intergovernmental tax body under the UN, where they do have a seat at the table. The EU – strong supporters of the UN as the forum to adopt sustainable development goals and climate treaties – last week rejected this. It argued that such a body would be unnecessary “institutional proliferation”. In response, the negotiator from India commented: “We find it a bit odd that we speak about a common agenda for everybody, and then we defend the right of an exclusive club to make policy on an issue which not only affects everybody, but also is central to the financing discourse.”

The EU is, on the other hand, promoting public-private partnerships and the use of overseas aid to support companies investing in development – often referred to as “blending”. The opportunities that “blending” hold for western companies are clear, since donor countries often choose their own companies as partners in these projects. The G77 – a group of more than 130 developing countries – is sceptical, stating: “The advantages for developing countries regarding the concept of blended finance are unclear and should further be explained.”

Civil Society has pointed out that private investors are more attracted to middle-income countries, which can provide better opportunities for profit. This risks driving aid away from the least developed countries. The shift towards profits also risks promoting tools such as user fees for infrastructure, or health and education services, which the poorest people are unable to pay. The G77 representative highlighted that: “The issue of public-private partnerships is important, but we want to caution that there are some risks and that those risks need to be mitigated. There is the experience that sometimes it is the government that is left with all the costs and the private sector with all the profits.”

One can sometimes get the impression that the EU’s strong focus on private finance is an attempt to divert attention away from the fact it has never fulfilled its commitment to deliver 0.7% of gross national income as aid.

The negotiator from the group of Least Developed Countries stressed that governments “should not go to Addis just to reconfirm commitments made 40 years ago”. They called for a scaling up of aid commitments, for concrete timetables for reaching the commitments, and for improving the quality of aid, including full untying of aid (lifting requirements by some donors that aid be spent on goods and services provided by companies based in their own countries, or a limited number of countries).

Debt is also a sensitive issue. After Argentina’s struggles with vulture funds, as well as increasing debt levels and crisis risks around the world, an intergovernmental process has been launched under the UN general assembly, with the aim of developing an international debt workout mechanism.

Despite its own crisis, the EU chose to boycott the first session of this process during negotiations and now refuses to include references to the UN discussion in the Addis Ababa outcome document.

Meanwhile, countries such as China and Russia are working constructively with the G77 on a better debt management regime.

The pressure on the EU is growing. Developing countries complain about EU countries using aid to pressure poorer African nations to stop supporting G77 positions on systemic reforms. If true, this would not be the first time such tactics have been used in UN negotiations.

Ultimately, if the goals are not ambitious enough, there is a risk that the negotiations will collapse.

This would seriously undermine the chances of reaching an agreement on the sustainable development goals – planned for adoption in September in New York – and would jeopardise the Climate Summit in Paris from 30 November to 11 December 2015.

Collapse would also mean the continued failure of intergovernmental cooperation. This would be devastating for the poorest countries and those in crisis due to natural disasters, poverty, disease, debt, food or financial collapse. It could also lead to more countries becoming tax havens, thereby increasing tax dodging and escalating inequality.

Negotiations continue in May. Our governments have less than three months to ensure that Addis Ababa leads to changes for the better, rather than the worse. 

First published in The Guardian