4. EU development banking: options to strengthen coherence, effectiveness and flexibility
Kathrin Berensmann, Benedikt Erforth, Niels Keijzer and Yabibal Walle
in: Hackenesch, C., Keijzer, N., & Koch, S. (Eds., 2024). The European Union’s global role in a changing world: Challenges and opportunities for the new leadership (IDOS Discussion Paper 11/2024). IDOS.
State of play
Europe is home to some of the world’s largest public development banks. They are part of a broader group of actors that constitute the European Financial Architecture for Development (EFAD). While a flexible concept, we understand the EFAD to encompass European and national development banks, such as the German Kreditanstalt für Wiederaufbau (KfW), the European Investment Bank, as well as member states’ implementing agencies and the European private sector (Karaki & Bilal, 2023). The European Union (EU) and its member states are collectively the largest provider of official development assistance (ODA) with European development finance institutions playing a central part towards achieving 2030 Agenda, realising the EU’s development goals and facilitating a transition towards a greener and more sustainable global economy.
Despite their significant lending volumes, European development banks face challenges in several key areas. As public banks, they have multiple mandates to fulfil. On the one hand, they provide concessional funding and loans that the market is either not ready or not able to supply, fulfilling a corrective mandate. On the other hand, they are, to an important extent, political institutions that implement political mandates and serve as a foreign policy tool to strengthen the EU’s global role. The balance between these and other mandates can differ greatly from one organisation to the next and is not always easy to achieve. European development banks face the additional collective challenge of working together and ensuring effectiveness as well as the visibility that is needed for the recognition and justification of their continued roles.
Against this backdrop, the contribution analyses two interrelated discussions:
- First, the debates within the EU on how to reform and strengthen the EFAD, also linked to the policy objective to promote external investment with a key role for the European private sector.
- Secondly, the discussion of, and progress towards, formulating a European vision on the reform of multilateral development banks (MDBs).
In 2018, member states commissioned a group of experts (the so-called Wise Persons Group) to develop proposals to improve the coordination and effectiveness of European development finance. The Council did not fully adopt the group’s far-reaching recommendations, such as the establishment of a European Development Bank. Instead, it proposed a series of incremental changes aimed at gradually reforming the existing system. These changes were also in line with the European Commission’s preference to have a key role in determining the focus of lending decisions.
Starting with the global pandemic and the growing realisation that poor visibility and coordination was hampering the EU’s global position, political impetus emerged from the European Commission’s aspiration to defend and advance the EU’s role in an increasingly fragmented world. The Covid-19 pandemic necessitated extraordinary measures and triggered an era of strong public intervention in the markets. Beginning with the financing and provision of vaccines and medical equipment, the EU’s joint efforts soon focused on recovery and reconstruction both within Europe and beyond. To coordinate these efforts, “Team Europe” was established – both a public communication effort and an approach to enhance coordination between member states and EU actors aimed to bolster the visibility of EU actions worldwide. A year later, in 2021, the Global Gateway was announced as the EU’s large-scale infrastructure investment programme, the delivery of which depended on the involvement of EFAD actors (see Section 1 in this publication).
Since then, cooperation between Public Development Banks (PDBs) and Development Finance Institutions (DFIs) but also the member states and the private sector has progressed. The focus now lies on operationalising the joint approach and subsequently recognising evidence that this new working method is delivering the desired results. Additionally, a specific policy change being sought is an enhanced and stronger role for the European private sector in the EU’s external investments. This focus is in part driven by the acknowledgement that public finance alone will not be sufficient to achieve the Sustainable Development Goals (SDGs), a fact which in the EU led to the announcement of its external investment plan in 2016 that set the basis for the current approach and priorities.
The EU’s continuing priority for the private sector was among other measures expressed in the creation of a Business Advisory Group (BAG) in which key stakeholders from the private sector are represented. The role of the BAG is to support the European Commission in increasing cooperation with the European private sector in the strategy and operationalisation of the Global Gateway (European Commission, 2024). The group acts as a forum to discuss the strategic direction of the Global Gateway. It was first convened in the margins of the Global Gateway Forum in September 2023, a meeting that brought together high-level government representatives and other key stakeholders associated with the Global Gateway. More information about the Global Gateway, which will be a key priority for the next European Commission, can be found in Section 1 in this publication.
Yet the policy priority also raised questions about the private-sector expertise within EU institutions and European public development banks. Such knowledge is crucial to determine where the use of public funds is really needed, to ensure value for money, and to avoid distortions in the market and investment climate in developing countries. European DFIs, with their longstanding private-sector expertise, such as the Deutsche Investitions- und Entwicklungsgesellschaft (DEG), can offer support. The so-called open architecture, which was introduced with the reforms of the EFAD, allows for them to be better integrated into the agenda-setting and operationalisation of European lending operations.
Internal and external influences
The above description of the “state of play” illustrates a situation in which European actors are translating ambitious proposals into practice. The EFAD finds itself in a period of change and restructuring, with both the EU and some of its member states simultaneously strengthening their capacities and priorities for external investment. The EU is not alone in this regard, as similar reform debates have been ongoing in the multilateral development banks.
Externally, the EU not only faces real competition but also the real limitations of investing in developing countries which have faced considerable fiscal challenges during and after the pandemic as well as in relation to ongoing crises. Since the EUs increased focus on development banking, investment and private-sector involvement strongly depends on the use of loans, the alarming – and in many cases already unsustainable – public debt situation in developing countries is an external factor that will require careful consideration (Keijzer et al., 2024).
These discussions highlight the need for the EU to strive for coherence in their internal and external engagement on sustainable investment.
Speaking with one voice: the EU and the MDB reform
European countries are among the largest shareholders of the MDBs, including the World Bank Group (WBG). For example, the 27 European Union countries account for almost one-third of the shares of the International Bank for Reconstruction and Development (IBRD), almost half of the contributions to the International Development Association (IDA), and more than two-thirds of the Heavily Indebted Poor Countries (HIPC) Trust Fund (World Bank Group, 2024). Given this substantial commitment, the EU needs to closely examine its relationship with multilateral institutions and ensure that its contributions are targeted to support global development goals and climate action.
EU countries should work towards a coordinated position in the discussions on the reform of the MDBs. It is commendable that EU countries were among the supporters of the World Bank reform process, but they should also coordinate their support in implementing the proposed changes. One priority could be to strengthen the financing power of the MDBs. For example, Germany’s leading role in providing EUR 300 million in hybrid capital to the World Bank has been instrumental in unlocking similar contributions from other EU countries. Moreover, EU countries should actively and collectively promote the use of callable capital by MDBs and help in the efforts to secure the recognition of its value by credit rating agencies. They should also support the channelling of Special Drawing Rights (SDRs) through MDBs, which, unlike through the IMF, can leverage SDRs up to four times. There are notable differences among EU countries in this regard. For example, while France and Spain are actively supporting the hybrid capital proposal of the African Development Bank (AfDB) and the Inter-American Development Bank (IDB), Germany has been cautious on on-lending SDRs. Beyond coordinating these responses, European countries should urge the European Central Bank (ECB) to clarify its position on channelling EU member SDRs to the MDB, an important obstacle in unlocking the full potential of this hybrid capital proposal.
Another important issue in this context is growing calls for governance reforms in the international financial architecture. The EU and its member states should be receptive to, and coordinate, their responses to issues of outdated governance and voting rights in the World Bank and the International Monetary Fund (IMF), a key demand of countries in the Global South. Delaying such reforms will result in significant costs, including the erosion of trust in not only the IMF and World Bank, but also in multilateral institutions in general.
In summary, enhancing the EU’s collective voice on MDB reforms could markedly enhance the EU’s global influence. By presenting a unified front, the EU can more effectively advocate for reforms that align with its values and priorities, such as sustainable development, climate action, and poverty reduction. Moreover, it can present itself as a relevant and credible global actor in an increasingly multipolar world.
Striving for more evidence-based decisions and improved coherence within the EU
When it comes to intra-European challenges, increased policy ambitions translate into a considerable learning curve for policymakers in the EU and its member states in terms of promoting investment and partnering with the European private sector. One clear risk is often referred to as “additionality”, inversely the possibility that the EU’s ODA supports investment that would also have happened without it, thus potentially distorting investment markets. Secondly, a general overview of how the practice is reflecting the policy ambition is still largely missing which makes it hard to assess whether the EU is effective in its investment promotion ambitions. Third, it remains unclear to what extent the focus on investment results in a stronger focus for spending EU ODA in more investment-friendly contexts, thus going at the expense of the EU’s engagement in least developed countries (LDCs) and fragile states. Fourth, the long-term public debt consequences of the EU’s policy ambitions also need to be carefully monitored and addressed where necessary.
A geopolitical Europe will require to further strengthen the role of the European private sector in development cooperation. European engagement in developing countries is not only about promoting sustainable development and economic change, but also about strengthening the EU’s influence and geopolitical weight in competition with countries such as China and Russia.
Resulting from the EU foreign ministers’ call for a European global connectivity strategy, the Global Gateway can be seen in part as a concrete response to this challenge (see Section 1 on the Global Gateway in this publication). This initiative has also created a platform for increasing the visibility of the European Investment Bank’s involvement, which has committed to delivering one-third of the Global Gateway’s target of EUR 300 billion in investment during the period 2021-2027.
A central hurdle will be to mobilise sustainable funding on a significant scale to promote investment in infrastructure. The Global Gateway target of EUR 300 billion (EUR 135 billion in private investments) is based on the assumption that the public funds under the European Fund for Sustainable Development+ have a leverage factor of 3.4 (Szczepański, 2023). This means that EUR 1 of public funds should help mobilise up to EUR 3.4 in private investments. However, while this ratio is more conservative than previous assumptions (e.g. the Juncker plan used the factor 15 and the Neighbourhood, Development and International Cooperation Instrument (NDICI) worked on the basis of a factor 10), this ratio remains difficult to achieve in practice and depends on a variety of factors related to the type of instruments, the actual project, and the composition of the countries.
Looking ahead
So, what policy options could the next EU leadership consider? The bottom line is that the EU’s focus on promoting external investment and the involvement of its private sector has been a standing policy priority for 15 years, with the aforementioned important initiatives having been introduced under the previous legislature.
Strengthen the effectiveness of the EU’s own instruments and approaches
- Strengthen the DFIs’ capacity to work together and in a complementary fashion to facilitate project development and implementation.
- Invest in coherent and credible communication of EU financial action abroad.
- Increase transparency around the leveraging of private capital, highlighting both opportunities and limits of this approach.
- Align pledges and disbursements better.
- Build on and expand coordinated initiatives between DFIs such as the Mutual Reliance Initiative involving the EIB, AfDB, and the German Development Bank KfW.
Ensure a common EU position on the reform of international financial institutions at the July 2025 UN Financing for Development conference
- In 2015, the EU prepared a detailed common position on the UN Financing for Development (FFD) conference in Addis Ababa, expressing a shared European vision at a key point in time when the 2030 Agenda and its Sustainable Development Goals were in the process of being finalised. The EU should once again prepare such a detailed position ahead of the next FFD conference that will be held in Spain in July 2025.
- Given the focus on the need for increasing investments, the EU’s common position also needs to give due consideration to, and make concrete proposals for, responding to public debt challenges in developing countries.
- Such a detailed position should in turn inform the EU’s engagement in further discussions on the reform of the MDBs (see next set of bullet points).
- The EU should be ready to apply any of these recommendations to its own development banks, as appropriate.
- The EU should actively coordinate and promote the mobilisation of more resources for MDB concessional funds, as this is crucial for global welfare.
Formulate and promote a European vision on MDB reform
- Promote the use of callable capital by MDBs and help in the efforts to secure the recognition of its value by credit rating agencies.
- Mobilise support for proposals to use donated SDRs as hybrid capital in MDBs.
- Urge the ECB to clarify its position on channelling EU member SDRs to the MDBs.
- Be receptive to calls to reform outdated governance and voting rights in the World Bank and the IMF.
References
European Commission. (2024). Global Gateway Business Advisory Group. https://international-partnerships.ec.europa.eu/policies/global-gateway/governance/global-gateway-business-advisory-group_en
Karaki, K., & Bilal, S. (2023). Strengthening the European financial architecture for development through better coordination (ECDPM Discussion Paper 351, p. v). ECDPM. https://ecdpm.org/application/files/6416/8837/0523/Strengthening-European-Financial-Architecture-Development-Better-Coordination-ECDPM-Discussion-Paper-351-2023.pdf
Keijzer, N., Barchiche, D., Lobos, I., Marbuah, G., & Dufief, E. (2024). Wie kann nachhaltige Entwicklung am besten finanziert werden? Vereinte Nationen 3/2024, 99-102.
Szczepański, M. (2023). The Global Gateway: Taking stock after its first year (European Parliamentary Research Service Briefing Paper 13-01-2023). European Parliament Think Tank. https://www.europarl.europa.eu/thinktank/en/document/EPRS_BRI(2023)739296
World Bank Group. (2024). The World Bank Group in Western Europe: Overview. https://www.worldbank.org/en/country/westerneurope/overview
