Isabelle Brachet is EU advocacy adviser at ActionAid; Maria Jose Romero is Policy and Advocacy Manager at the European Network on Debt and Development (Eurodad). The article was first published on Euractiv. 

On the surface of it, proposals for the next EU budget 2021-2027 look good for the Global South as they are aimed at helping countries to address the multiple health and economic crises triggered by the Covid-19 pandemic.

The amounts allocated for ‘external action’ (development) have been increased, with an additional €1 billion set aside for this year, and €10.5 billion to be spent by 2024. The latter comes under the external pillar of a new instrument entitled Next Generation EU aimed at financing the European recovery from Covid-19. So far so good.

But look beneath the surface and a different picture emerges. All of the additional money put on the table for development cooperation is meant to facilitate loans to governments and companies, through guarantees, and not grants.

As European leaders prepare to meet this Friday to discuss the budget, we urge them to look closely at the detail. Below are three important questions raised by the current budget proposal which need answering before it is agreed.

How will channelling scarce development funds into loans to businesses benefit the Global South?

The first question is whether using huge amounts of scarce development funds to facilitate loans to business enterprises is the best use of public money, in view of the limited evidence that this improves people’s lives on the ground. The European Commission’s justification for that decision is that “the Commission considers it is appropriate”. That looks like an ideological rather than an evidence-based approach.

The European Commission published a report on the implementation of its private sector instrument (the European Fund for Sustainable Development, EFSD), the same day it issued its budget proposal.

This report does not hide the fact that the EFSD potential for success is speculative. It is a potentially promising pilot project that should be continued and whose impact on the ground should be monitored. But scaling it up massively in the absence of positive impacts shouldn’t be the way forward. There are simply too many risks involved.

A recent report commissioned by the European Parliament on EU blended finance (a combination of official development assistance with other public or private resources) flags some of these risks. Going for this option means there are less grants available, which are what many low-income countries actually need. Budget support and grants have been proven to deliver. Budget support is also best able to respect partner countries’ own priorities and choices, in “a partnership of equals”.

Is it right to subsidise private companies with development resources to encourage investment in the Global South?

The second question is whether subsidising private companies with development assistance to encourage them to invest in the Global South is the best way to contribute to thriving local economies in partner countries. Subsidies to local companies have a role to play in times of crisis – but only if profits are reinvested in the local economy, and not if returns end up in the pockets of shareholders in wealthy countries.

In addition, subsidising businesses is set to fail in the absence of basic standards – rule of law, well-functioning administrations, progressive taxation, active civil society, effectively implemented labour standards and good governance of natural resources.

What will saddling developing countries with more debt mean for already underfunded health systems and public services?

The third question is whether encouraging loans to partner countries will further deepen the indebtedness of developing countries. A key demand from countries in the Global South today is to cancel their debt. An emerging debt crisis has already left health systems in Africa vastly underfunded and ill-prepared for the coronavirus pandemic, with debt servicing far outstripping spending on health. Eurodad research shows that between 2010 and 2018, external debt payments as a percentage of government revenue grew by 83% in low- and middle-income countries. While ActionAid recently showed that some countries are spending more on debt servicing than they are on health and education combined.

On top of grappling with underfunded health, education and social services, many countries are struggling to support their farmers who are confronted with the effects of climate change; their informal workers, who lack social benefits linked to a formal job; and women, who are disproportionately affected by the economic downturn. If the EU further encourages loans, leaders will have to make sure those loans are provided on very favourable terms to borrowing countries.

In parallel, European governments should go beyond the temporary debt service suspension for the poorest countries agreed by the G20. These measures – and also those enacted by the IMF – are providing temporary breathing space for just a few of the countries in need, and may only postpone debt crisis risks. Debt payments need to be cancelled altogether in 2020 and 2021. EU Member States recently expressed support for a coordinated international debt relief effort for partner countries – and we welcome that. Such a process will also need to ensure countries’ financing needs (both to recover from the Covid-19 crises, and to continue pursuit of the Sustainable Development Goals and Paris Climate Agreement are fully considered.

We hope that, building upon the Commission’s proposal, negotiations with the European Parliament and Member States will result in a more balanced approach between the different aid modalities, so that part of the new resources will be used for grants. As well as governments, this should include civil society organisations, which are also being hit hard by the crisis.

Endorsing the current proposal risks further promoting untested instruments at a time when developing countries need resources the most.