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Errors and Omissions: A glance at the European Commission’s new Communication on Policy Coherence for Development

The European Commission has released a new Staff Working Document on Policy Coherence for Development (PCD). The Commission’s report covers the first three years of the EU’s attempts to implement the Sustainable Development Goals, an endeavour for which PCD is crucial. The document however unveils that the EU’s PCD framework, as complex as it might already be, continues to have severe omissions – in particular the complete neglect of the EU’s fiscal and monetary policies on sustainable development in and outside the EU. Moreover, while the Communication maps EU policies on taxation and investment, it sells some of those as positive contributions while it neglects the risks and negative impacts that EU policies in these areas have.

Coherence in times of Sustainable Development objectives

Perhaps the most useful part of the brand new 2019 EU report on Policy Coherence for Development, the first such assessment by the European Commission since 2015, is that it maps all the different PCD-related bodies that the EU has set up recently, and all the documents of different stages of relevance that these bodies have produced. These were many, and this is interesting to know. The report is much weaker when it comes to actual policy.

A challenge that a PCD-monitoring report necessarily faces is where to stop, given the comprehensiveness of the concept. The Commission authors decided to focus on the narrower concept of PCD, instead of Policy Coherence for Sustainable Development (PCSD), the latter would include impacts of EU policies on sustainable development in the EU, while the former only covers the impacts on developing countries. This makes sense to reduce complexity, it is however an omission as such, and it has not prevented the authors from omitting to address whole policy areas relevant for the global south.

Fiscal and monetary policy: Gap in the EU’s PCD framework

Two of the key policy areas, perhaps even the most relevant ones, with which the EU impacts on developing countries’ development conditions, are its fiscal and its monetary policies. Global agencies, such as the International Monetary Fund, have argued over and over again that for the world economy to reach its full growth potential countries that do have fiscal space to invest must use that space, so that third countries can benefit from the additional demand they create. The EU’s austerity policies over the past decade have hit hard, not just on the EU citizens but also the EU’S trading partners in the global south. 

On the monetary policy side, the European Central Bank (ECB) quantitative easing policies have been boon and bane for developing countries. It has helped them access cheap foreign finance and attractive terms. On the other hand, it has also  facilitated irresponsible lending and borrowing, tempting many countries into a new debt trap and contributing to a new wave of developing country debt crises.

No reflection at all on fiscal and monetary policy is in this PCD report, which renders it largely useless to assess the coherence of EU policies on development overall. This however is not just the authors’ fault. Fiscal and monetary policy have never been defined as explicit policy areas of the EU’s PCD framework, and so there has never been any systematic monitoring of their impact.

Development finance: Coherent use of EU resources?

Other finance topics are covered. Not surprisingly, the 2019 report devotes a lot of space to migration and asylum, areas that are supposed to get more prominence in the next multiannual financial framework (EUR 34.9 billion, compared to EUR 13 billion for the period 2014-2020) despite civil society concerns that – if such funds are used to restrict mobility – they may harm the very people they purport to help.

Climate Finance should also be promoted through the next MFF, states the report. The target for climate-related spending will be lifted from 20 to 25% of the budget, which is supposed to boost available resources by EUR 16 billion per annum, if the target is reached. Workers’ remittances is a third finance area that the report showcases: the EU commits to help reduce transaction costs to less than 3%. The Commission also proudly reports on the EU’s financial allocations for vaccination and immunisation (200mn in the current MFF), and showcases the EUR 250mn ’Switch to Green‘ project in the Mediterranean Region as good practice for sustainable consumption and productions. This is interesting information, partly even relevant, but in a PCD report one would wish to see information on e.g. the EU’s ODA gap, data on EU spending on fossil fuel subsidies, or an assessment on what the diversion of ever more funds to combat migration implies for the EU’s development budgets’ potential to finance the eradication of poverty and reduction of inequalities.  

Taxation: as if the EU raced to the top

The most central PCD issue in relation to tax would be to ensure that there are no harmful tax practices in EU Member States, which can be used by multinational corporations and wealthy individuals to dodge large amounts of taxes in developing countries. Unfortunately, the are strong reasons for being alarmed on this point. The European Commission’s own tax department – DG Taxud – has highlighted that at least seven EU countries have very problematic tax structures, namely Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and The Netherlands. Eurodad very much agrees with the Commission on this point – as highlighted in our report Tax Games - the Race to the Bottom: Europe’s role in supporting an unjust global tax system”. But not only does the PCD report fail to address this issue – on the contrary, it goes as far as to highlight Ireland as a good example on PCD and taxation. This is even more problematic when considering the fact that another part of the Commission – DG Competition – has ruled that Ireland provided illegal state aid to the IT gigant Apple, when it, according to the Commission, helped Apple dodge around €13 billion of taxes on profits the corporation had made in Africa, India, the Middle East and Europe. Ireland has appealed the Commission’s decision to the European Court of Justice, where a final ruling is still pending. None the less, there doesn’t seem to be any reason for highlighting Ireland as a good example of PCD as regards taxation.

On a positive note, the report recognises the need to improve the global architecture for tax governance, which has for many years been dominated by the interests of rich countries. However, the report then goes on to talk about the rules on Base Erosion and Profit Shifting (BEPS). These rules were negotiated in a process led by the OECD, also known as the „rich countries‘ club“ in a process from which over 100 developing countries were excluded. The rules have also been criticised for failing to solve the problem of corporate tax dodging, and for providing a „sticking plaster“, rather than the fundamental reform that the global tax rules need. After the BEPS package, which covers almost 2000 pages, was adopted, the OECD established the „Inclusive Framework“, where developing countries were invited to come and follow the rules, as well as participate in any further decision making within the framework of the agreed rules. However, this does not replace the need for a decision making forum where all countries can participate on an equal footing, and put their issues on the agenda. That is why developing countries have continued to call for global decision making to take place under the United Nations, where all countries participate as equals. This call has, however, not yet gained support from the EU.

Instead of focusing on the EU’s duty to clean up its own house, the PCD report highlights the EU efforts to blacklist countries that – according to the EU – are not showing a will to cooperate on taxation. The first thing to notice about the EU’s tax haven blacklist is that it doesn’t include one single EU Member State, nor does it include any large and powerful countries such as Switzerland. Furthermore, it is worth noticing that in December 2017, the EU’s blacklist suddenly included a country such as Mongolia. While nobody can argue that Mongolia is a tax haven, the EU blacklisted the country with the argument that Mongolia hadn’t committed to following the OECD’s tax rules. Mongolia has since then been taken off the EU’s blacklist, when the country signed on to these rules. The way that global tax rules are set without full inclusion of developing countries, and afterwards imposed through blacklisting, raise serious concerns about the EU’s respect for the right of developing countries to participate in decisions that concerns their own tax systems. Whatever this is, it does not look like PCD.

Mobilising investment: Just pros, no cons?

The report also gives a detailed account of efforts to mobilise investments. The Commission lauds the EU’s External Investment Plan, the EU’s investment promotion instrument which promotes business and investment opportunities for the private sector through technical assistance, a so-called policy dialogue (i.e. soft conditionality) and the European Fund for Sustainable Development that is endowed with EUR 4.1bn of public money and supposed to mobilise 44 billion of private investments through loan subsidies (blending) and guarantees. Critiques have long argued that this development finance strategy is a double-edged sword: While private investment can be important, the strategy to subsidise it with public money could create massive opportunity costs for tight aid budgets, excessive windfall profits for private investors in the global north whilst small enterprises in the global south are side-lined, and debt sustainability risks, if not outright, debt crises in target countries. There is no critical view at all in the Commission’s working paper, not even a balanced discussion of the pros and cons from a PCD perspective. These are critical omissions in light of current negotiations of the next MFF – the EC proposal on the table places central stage the use of private sector instruments. Without a proper assessment of its pros and cons, the EC runs the risk of not being coherent.

Errors and omissions: Towards value for policy-makers

A Commission staff working paper would be a far more informative piece for the European public, and a far more useful tool for decision-makers; if the Commission was not just showcasing good practice (or what it thinks that good practice is) but identifies the gaps, the errors and the omissions in the EU PCD framework and PCD practice. Let’s hope that this working paper at least helps to revitalise the PCD-discourse in the EU. One thing it does prove is that there is a lot of upward potential.