European Development Assistance Needs a New Direction

Relations between the United States and  China will be in keeping with the global rollercoaster in the next four years: it will be tough and it will be fast.  

And it will be particularly difficult for the EU, which is already falling behind as its global competitiveness is taking a hit both economically and geopolitically. 

China’s effort to court Europe to join forces against the United States is falling flat, not only because the  relationship between the EU and China has changed profoundly, but also because of the current EU dependencies on the United States for security, energy and  trade leave Europe little to no room to maneuver.

It has been clear for some time that the EU urgently needs to branch out and create industrial and trade partnerships in the world apart from the United States and China. The boldness with which the Commission President acted when she took a plane to Uruguay to ink the Mercosur agreement, despite vocal French opposition, is a testimony to that imperative. It is a great step forward, coming at the right moment and bringing benefits beyond just simple bilateral exchange. There will be many value-chain gaps to fill and this is an opportunity the EU cannot miss. The free trade agreement with India should be the next priority.

But trade arrangements are not enough. To build diversified value chains, the European private sector needs new natural resources, manufacturing hubs, and sustainable skills. 

The EU’s policy of choice  seems to be  Global Gateway, a connectivity strategy  long in the making, first as the EU–Asia Connectivity Strategy in 2019, and then as Global Gateway in 2021. We are now entering 2025, and the latest slogan is, “The EU will now take Global Gateway from start-up to scale-up.” This just might be the best way to define the failure: if something is a start-up after six years of intensive work and two strategies, with no concrete projects to show for it, then it is simply not working. 

Global Gateway in its current form is a confused strategy trying to merge development assistance agendas with the needs of European business and industry. Europe’s aid philosophy, unlike those of the United States and Japan for example, is to provide strictly non-tied aid. Therefore aid and  business interests are almost mutually exclusive. Besides, the real ask is much bigger: investment in value chains’ strategic infrastructure in emerging markets is external industrial policy and cannot be planned for or implemented through the aid method. Finally, partners want to move up value chains, and for that they need investment, not aid.

The Belt and Road Initiative (BRI) is the best example: despite all the storytelling, it is in essence an export and investment strategy, with a massive geopolitical bonus. It is financed by commercial value loans, with interest rates anywhere between 4.5 and 6% or more, usually coming in a combination of Chinese money, Chinese project management, Chinese workforce, and collaterals that encourage heavy dependency on China. 

The EU needs a course correction. That opportunity comes with the new budget cycle, which, in the end, will be the most honest blueprint of how strategic the EU will—or will not—prove to be.

The current numbers are perplexing. The OECD notes that the annual disbursement for what is strictly Official Development Assistance (ODA)—grants and concessional loans—among the three most powerful global economies are  respectively the United States €60 billion, China €7 billion, and the EU area €95 billion (mostly member-state funding, especially Germany). 

At the same time, common European annual and cumulative disbursement of funding for development assistance is almost equal to the Chinese BRI loans investments. The economic and geopolitical effect however is almost the opposite. 

A bit of calculus for the end. If the EU area were to combine, say, €60 billion ODA and €40 billion export credit support already available, and create  a pool where various instruments could raise  private capital in the range of 1:4 or 1:5, that would mean €400–500 billion annually. In ten years, that could create four to five trillion euros’ worth of investment. 

Now that would be a game changer. Of course, simple math is never that simple. But it helps our thinking and can initiate a process of change.

The most appropriate place to start that process is with the European Council. Member states disburse the vast majority of these funds, and they are key leaders on industrial policy. Real change can come only from their collective will to initiate it.

This piece was originally released in Handelsblatt on December 28th 2024.