The European development financing system: A call for urgent action

As the international development community gathers in Washington, DC for the World Bank Group and International Monetary Fund annual meetings, reality is hitting everyone hard. We are far from reaching the promises of moving from the ‘billions to trillions’ necessary to finance the Sustainable Development Goals, and external resources for developing countries are going down.

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      The drop is even sharper in private investment, although official development assistance remains stable. As donors’ ambition to mobilise more private finance for development fails to materialise, the poorer countries and the poorest people remain left behind.

      It is in this context that the High-Level Group of Wise Persons on the European financial architecture for development released its report earlier this month. Set up at the request of the Council of the EU following a call by France and Germany, the group was meant to share some wisdom and concrete recommendations on how Europe could reshape its approach to financing development more effectively.

      In particular, it was tasked to reflect on the respective roles of the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), and ways to rationalise the EU financial architecture for development.

      Wise words – but falling short

      The report is a useful contribution to take the political and technical reflection about the European financial architecture for development to the next level. Its main merit is to focus political attention in Europe on development finance and its institutional fragmentation. It identifies some clear priorities for the European Union (EU) in an interdependent world: tackling climate change more vigorously and engaging more with African countries – particularly the poorer and more fragile ones – for job creation and stability.

      It calls for the European system to urgently deliver more (in terms of volume of finance and development impact) and more effectively, including in terms of policy coherence, coordination and institutional design, to avoid unnecessary duplication, overlap and harmful competition.

      The wise persons group makes a number of sensible recommendations for immediate action. These include a call for stronger policy guidance (by the Council and Commission), better branding of European development finance (à la Chinese Belt-and-Road initiative), and better coordination (for instance among EU members states on the board of financial institutions, through joint programming, by adopting common standards for private sector support, by creating investment platforms in partner countries, and by promoting cooperation among finance partners).

      However, it is the recommendation of setting up a European Climate and Sustainable Development Bank that risks attracting most of the attention. But it would be a mistake to focus on this recommendation for two reasons: first, it falls short of expectations, and second, it could be a distraction.

      Out of the blue, the report outlines three options for the new bank. Option one: all eggs in the EBRD basket; option two: a mixed bag of shareholders owning a new bank; and option three: an EIB subsidiary.

      The report fails to assess the policy and development implications of the three options proposed and does not properly explain why we need a new development bank instead of improving existing financial institutions and strengthening cooperation among them.

      The report also does not specify how the operations of the new European bank should differ from current practices. Finally, the options proposed risk heightening the rivalry between the EBRD and EIB, at least in the eyes of some policymakers, which would be counterproductive. This should not become a beauty contest. While a new bank might be needed, the focus should be on its added value, in terms of objectives, institutional settings and modes of operation.

      Three imperatives to improve European development finance

      For Europe, there are three imperatives on which its financial architecture for development should be judged.

      The first one is Europe’s ability to mobilise more private finance for greater impactincluding for poorer and more fragile countries. While the wise persons group report usefully recaps the key principles endorsed by all international development finance partners, it does not clearly identify new approaches to live up to the ‘billions to trillions’ agenda.

      In practice, such approaches would include moving from project-based to portfolio, system-based and policy-driven approaches – or what the World Economic Forum calls moving from funding to financing for sustainable development, focusing on the catalytic and transformative impact of development finance, building on developing countries’ own priorities and dynamics. It also means accepting greater risk for more development impact.

      Second, European interventions need to be more coherent and coordinatedas rightly stressed in the report. But it is not simply about having one single institutional framework. The External Investment Plan and the proposed enhanced European Fund for Sustainable Development (EFSD+) are here to stay, and so are the national finance institutions for development.

      Reducing the fragmentation of the European financial architecture is therefore not just about the EIB and EBRD. It is about promoting greater coordination and synergy among bilateral and European institutions, as well as with other regional, international and multilateral finance institutions.

      Third, European development finance should reflect and serve the EU’s own interests, values and priorities better. This remains a controversial issue among development actors. But it is the reality of a Europe that seeks to strengthen its geopolitical role in the world, in its neighbourhood, and in Africa in particular, including as the biggest development financiers.

      It is about fostering stability and better governance, reducing the risk of conflicts and migration pressures and strengthening economic and political ties in a win-win partnership model à la EU, as a reaction to the China approach.

      Decisions on the future EU financial architecture for development need to build on these three points, as well as the merits of a Climate and Sustainable Development Bank and its institutional set-up. Wise words must now be matched by bold action and pragmatic approaches.

      The views are those of the author and not necessarily those of ECDPM.

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