A new European Commission: What are the implications for Development Finance in the next five years?
Following the European elections in May, former German defence minister Ursula von der Leyen has assumed the role of President-elect of the European Commission. In July, von der Leyen, the first woman to take this post, released a concept paper titled “A Union that strives for more” and on Tuesday this week she unveiled the names of the new Commissioners. And with these releases, the policy agenda of the next European Commission, mandated to govern until 2024, is slowly taking shape. In response, we ask what are the implications for development finance?
Sustainable financing for sustainable development?
Sustainable development rhetoric scores highly on von der Leyen’s policy agenda, but the devil lies in the detail. The concept paper outlines “a strategy for green financing”. Within this, she proposes using blended financing instruments, i.e. devoting limited public resources to leverage private investments, following the widely criticised global trend led by the World Bank. For quite some time, multilateral development banks have promoted similar leveraging strategies under the theme ‘from billions to trillions’. In line with this ideology, von der Leyen’s paper states that “public finance alone will not be enough” and that “we need to tap into private investment.”
Consequently, the key pillars of the financing strategy are on the one hand the “Sustainable Europe Investment Plan”, ostensibly blended finance with the objective to “support” one trillion euros of private investments in the EU over the next decade most likely through subsidised loans and public-private partnerships. The latter have a very poor track record both in developed and developing countries alike as Eurodad research on PPPs has found and in any case, one trillion euros over a decade will not be enough. The Commission itself has previously analysed that €1 trillion of investment is needed annually for energy transition alone. Moreover, a private investment-centred strategy for sustainable development risks leaving the poorest people behind.
On the other hand, the European Investment Bank is supposed to change its financing mix and become Europe’s Climate Bank. The target is to scale up the share of finance from 25% to 50% of the portfolio by 2025. These changes reflect the already agreed end to the EIB’s heavily criticised investments in fossil fuels, but the concept paper does not specify clearly from which sectors funding will be reallocated.
Fair taxation on the policy agenda?
One remarkable feature of the new Commission is that Margrethe Vestager will continue heading the competition portfolio. In this role, she has previously played an important role in taking on state aid cases related to large-scale tax avoidance by major multinational corporations. It is laudable that she will continue. State aid cases, however, are not enough as the underlying problems with corporate tax avoidance will not be addressed until the tax system itself is fixed.
Von der Leyen’s concept paper acknowledges in principle that “the race to the bottom” on taxation is a challenge for the EU and that everyone needs to “pay their fair share” to make Europe’s social market economy work. The policy proposals that are eventually outlined, however, are of little import. She primarily mentions the ongoing work on the common consolidated corporate tax base (CCCTB), which is an important file that could improve the corporate tax system, but also an initiative that has long been on the table, with little progress. The central issue of whether citizens should be allowed to see what multinational corporations pay in tax (public country by country reporting) is conspicuously missing from the document. On this last point, von der Leyen’s home country of Germany has been pushing against progress and as such, it is highly concerning that the issue has been left out of her concept paper.
Another troubling detail is the fact that while she promises to strengthen the fight against harmful tax regimes, she refers only to “third countries.” Little is mentioned on how she will act on the tax havens and harmful tax practices within the EU. The outgoing Commission has played a key role in calling out harmful tax practices in EU Member States — such as Luxembourg, Ireland and the Netherlands — and helped increase awareness around the significant negative impacts this can have on other EU Member States as well as third countries. In the fight for fair taxation, it is vital for the Commission to continue this important work.
In terms of EU decision making, von der Leyen pledges to continue pushing for decisions on tax to be taken by a qualified majority, as opposed to the current unanimity decision making. We have yet to see whether the Commission will be successful in this attempt.
What direction for EU development cooperation?
The most tangible proposal in the area of development cooperation is to adopt a new “Comprehensive Strategy on Africa.” So far, little is known about scope and content of this strategy, but parts of Leyen’s policy agenda indicate that development cooperation will be more closely linked to other policy areas such as security, trade and migration. This might mean progress towards greater policy coherence for development, but it could also imply an instrumentalisation of EU development cooperation to advance the EU’s interests in the region with regards to migration or trade. It will be important for the new Commission to ensure that promoting human rights, aid effectiveness and eradicating poverty remain the central objectives.
The concept paper reinstates the EU’s previously agreed plans to scale up funding for EU external action by 30%. Such an increase, however, is insufficient if the EU’s international commitment to scale up official development assistance to 0.7% of GNI is to be reached, unless additional action is taken by the Member States. Moreover, it is not clear how this money will be spent. The mission letter by the new Commissioner for International Partnerships Jutta Urpilainen, a former Finish Finance Minister contains some extremely worryingly language: “You .. should be ready to adapt bilateral funding to achieve our objectives on migration management.” But, Leyen’s mission letter to Urpilainen also stresses that “each Commissioner will ensure the delivery of the United Nations Sustainable Development Goals.” If this is to happen, it is vital that Europe’s scarce development aid resources are targeted towards the SDGs.
Where is tackling the next debt crisis on this agenda?
Jean-Claude Juncker, von der Leyen’s predecessor, had the difficult task of steering the EU through the Euro crisis. In contrast, von der Leyen is entering the Commission in relatively quiet times, no EU country is currently under an European Stability Mechanism bailout programme since Greece terminated theirs last year. However, earlier this year the World Bank looked at the state of the world economy and seen ‘darkening skies.’ Meanwhile, the IMF reports that a new debt crisis has already struck poor countries, with almost half of low-income countries in or at a high risk of debt crisis. Projections for the EU are not good either. By not suggesting more ambitious institutional and policy reforms for debt crisis management and prevention, von der Leyen’s paper misses a key opportunity.
Instead, the concept paper largely reinstates past initiatives, such as those towards the European Deposit Insurance Scheme (which should prevent bankrupt private banks being bailed out with public monies) that has faced political resistance in the past by some Member States. The quiet period could have been used to introduce effective institutions for sovereign debt workouts in the EU as well as supporting them globally. Such institutions would have helped to prevent the last Euro crisis and the next, but the new Commission has so far turned a blind eye to future risks. By doing so it misses the opportunity to fix the roof while the sun is shining. This is remarkable as another new actor in the EU arena, former IMF Managing Director Christine Lagarde, who has just been appointed as new head of the European Central Bank, has already announced that she will continue with her predecessor Draghi’s ultra-lax monetary policies. If the European Commission remains passive, the ultra-high debt levels in some parts of Europe and global economic turbulences will leave the EU no other choice than using the tools of the ECB.
Despite, or rather because of, the structural and political challenges all Commission Presidents face, one would have hoped for von der Leyen to set higher ambitions early in her term. If the EU is to achieve the 2030 development agenda’s ambitious targets and support partner countries to do the same, much more needs to happen over the next five years.