The EU’s Global Gateway: The European Financial Architecture for Development

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Blog by Jeroen Kwakkenbos, Acting Head of Oxfam EU office
Published: 30th May 2023

The European Union has adopted a new approach to foreign policy dubbed the “Global Gateway,” supported by a new European Financial Architecture for Development (EFAD). These policies are a direct response to the state of permacrises that the world finds itself in. It seeks to inject 180-300 billion euros over a period of six years into the EU’s partner countries in the form of infrastructure projects, a green transition and digitalisation. This strategy seeks to mobilise resources from EU member states, Multilateral Development Banks (MDBs), National Development Finance Institutions (DFI's) and the private sector to reach its target of 30-50 billion euros a year.

The EU’s main challenge is that the Multi-annual Financial Framework (MFF) – the EU’s budget - which dictates the limits on EU spending for a seven-year period has already been concluded. All EU resources have been allocated. The same goes for the main foreign policy financial instrument of the EU, NDICI Global Europe. This development instrument of roughly 14 billion euros per year has already seen its spend allocated to projects and programs - many of which would not qualify under the Global Gateway. The EU’s main resource to leverage is private finance. The European Fund for Sustainable Development Plus (EFSD+) is an example of this with its total cap of 10 billion euros over 7 years. This would mean an unrealistic leverage ratio as the instrument is supposed to target the OECD’s list of so-called ‘Least Developed Countries’. This leaves EU Member States, who are already under budgetary pressure and are unlikely to increase their development budgets in the coming year, and the MDBs, where the EU is not the only player, as the main source of finance for the Global Gateway.

While the green transition is critical in combating the climate crisis and additional finance must be found, we are concerned that the Global Gateway could draw resources away from other development interventions crucial for combating inequality such as support for public services and poverty eradication programs. Most of the EU's foreign policy instruments are development instruments, and those flows must retain their development characteristic and purpose. This money should not be redirected to geopolitical priorities. While much is made of leveraging resources from financial markets, these types of financial flows are not a given and come with significant development risks.

Through the Global Gateway and the EFAD, the EU may have set itself up for scoring an own goal as the reputational risks of not delivering what was promised to our partners is significant. There are already alternatives to the Global Gateway where the EU and its member states could use geopolitical clout. This could free up significant financial resources for the EU’s partner countries and comes with a minimal hit on the EU’s purse strings. Rather than spending time frantically trying to raise funds that simply aren’t there and double count already existing commitments, the European Commission could better spend its time on other, more effective, opportunities. Below are six ways to take the Global Gateway and EU development aid forward.

1: Pool all funding in the same pot

Europe and its member states can increase development resources by being more efficient through the successful implementation of the aid and development effectiveness principles. In both Paris in 2005 and Busan in 2011, the global community gathered to declare “this is the way to do development” and then proceeded to implement the principles and recommendations with mixed results. Team Europe and the Global Gateway are opportunities to revitalise aid and development effectiveness through consolidation and harmonisation of the EU and member states’ development resources. Reducing duplication of programs, transaction costs and harmonising monitoring and evaluation would bring more resources to the table and increase their impact. While it would be good to see it in action, even if under the rubric of an EU branding activity, it will not provide anywhere near the resources required to achieve the SDGs. So, in short, while long overdue, it is not sufficient.

2: Live up to broken promises

The easiest way for the EU to increase its development resources is by making EU countries live up to their 0.7% target. If this target was taken seriously by the entire donor community, it would amount to significantly more than the promised 30 - 50 billion a year and contribute to achieving the objectives set out by the EU. However, this scenario is, sadly, incredibly unlikely. Aid budgets are stagnant and very few countries have taken their commitment to 0.7% seriously. Oxfam has estimated that in the 50 years since the target was initially developed high-income countries have failed to deliver a total of 5.7 trillion USD in aid. Worse, the future points to a reduction of aid rather than an increase and to EU countries spending more development money at home.  

3: Be mindful for significant leverage

One of the key ways the EU plans to hit the 300 billion target is through using public money to leverage resources from financial markets and other public development banks. This will be done through its EFSD+ guarantee instrument. Experience under the previous EFSD instrument has shown that these kinds of projects are complex to negotiate and, as the European Court of Auditors noted, its ability to mobilise additional investments was likely overestimated. Given that a significant amount promised is supposed to come from this leveraging of public money, which is an estimate yet to be realised, it is impossible to know if this target will be reached.

Alternatives that can raise significant revenues:

1: Cancel debt of partner countries

In 2022, the IMF warned that a quarter of emerging economies and two-thirds of low-income countries are in or near debt distress. In 2021, on average, low-income countries spent 27.5% of their budgets on debt repayments, double the proportion spent on education, four times that spent on health and nearly twelve times that spent on social protection. If the EU were to use its geopolitical clout to champion for debt relief and debt cancelation, it could free up significant fiscal space for its partner countries. A first step would be to support the cancellation of all debt repayments for overindebted lower- and middle-income countries until the end of 2023.

2: Transfer Special Drawing Rights (SDR’s) to poorer countries

The IMF's decision to issue 650 billion USD in Special Drawing Rights to mitigate the economic impact of the Covid-19 pandemic was a momentous occasion in global solidarity. However, perversely, due to the IMF quota system, the majority of these SDRs went to rich countries that needed them least. Since then, there have been commitments by wealthy countries to transfer SDRs to low- and middle-income countries but this has been hampered by arcane European Central Bank rulings and self-imposed restrictions. There are ways for the Global Gateway to access these resources, circumventing the ECB’s restrictions and transferring them to the Multilateral Development Banks and countries needing them the most, but so far no action has been taken. This alone could free up billions of euros for partner countries. In addition, the EU could support a new issuance of SDRs further increasing financial resources.

3: Tackle tax evasion and avoidance

Low-income countries lose billions to corporate tax avoidance and tax evasion stashed in tax havens every year. Countries on the African continent have had the highest net loss to profit shifting from multinational companies. Other research has shown that the share of wealth hidden by rich elites in tax havens tends to be much higher for many low-income countries. Cracking down on tax havens and setting tougher rules to enforce tax transparency could unlock billions for development.

The EU's Global Gateway could be a game-changer. It could provide partner countries the type of financial resources needed to support a green transition and scale up development projects. But, for it to do so, the EU must deliver on its promises without undermining its already existing commitments. The EU already has means at its disposal to significantly increase its support to partner countries without having to resort to double counting and financial alchemy. If the Global Gateway amounts to a re-branding exercise for what the EU and its member states are already doing in partner countries, then it would amount to a wasted opportunity.

The EU has proven in the past to be a champion of supporting countries’ systems and public services in its foreign policy. We expect it to continue doing so.