European Union finance ministers discussed a “global recovery initiative” in response to the COVID-19 pandemic Tuesday, though the planned link between debt relief and sustainable investments remains vague nine months after the idea was first announced.
Ursula von der Leyen, president of the European Commission, told the United Nations last May that Europe needs to do more than hold pledging conferences on global access to vaccines. “I would like to propose something even more ambitious,” she said at the event on Financing for Development in the Era of COVID-19 and Beyond. “We need a global recovery initiative that links investment and debt relief to the Sustainable Development Goals.”
That was interpreted by some as a call for so-called “debt-for-SDGs swaps,” whereby, as the Center for Global Development put it in its analysis, “in exchange for debt forgiveness, the debtor-government commits to invest the accrued savings in SDG-related investments.”
That link appeared less explicit, however, when Jutta Urpilainen, the EU commissioner for international partnerships, briefed journalists on the initiative Tuesday.
The EU and its member states are discussing debt relief in various forums, such as the G-20, International Monetary Fund, and Paris Club — where Urpilainen said she hoped EU states can “speak with one voice.” At the same time, the commission is programming its 2021-2027 development work in a new “Team Europe” spirit of coordination with other European actors, including through the use of guarantees designed to spur investment in low-income countries. But for now, the discussions on debt relief and programming are separate.
“President Von der Leyen’s proposal mooted in May last year for a global mechanism for debt-for-SDGs swaps seems to have been lost in the ether,” Mikaela Gavas, co-director of CGD’s Europe program, told Devex by email Tuesday. “That’s not surprising given the EU’s lack of leverage in the debt debate, especially with the world’s largest debt-holder, China. But the Commission is now trying to reframe the initiative into a package of what is already going on, including joint programming and private sector investment.”
Speaking on condition of anonymity, commission officials told Devex Tuesday that Urpilainen’s department had explored the idea of debt-for-SDGs swaps with EU member states, but that the idea had been shot down by finance officials.
“Many low-income countries, they are really fighting with the debt burden. And we know that we need to use different kinds of tools in order to give them more fiscal space.”— Jutta Urpilainen, EU commissioner for international partnerships
The occasion for Tuesday’s media briefing was an informal meeting of finance and economic ministers from EU states, but even that was complicated.
An EU member state source, speaking on condition of anonymity, told Devex that Urpilainen had wanted to organize a joint meeting of finance and development ministers, “to discuss the debt issue and to get both on board of a global recovery based upon the freeing of national budgets by alleviating debt pressure on the most affected counties.” Instead, the source said, finance ministers “took her by surprise and the development ministers were not invited.”
When Urpilainen, a former finance minister of Finland, took the floor at the virtual meeting, she backed calls for a new allocation of IMF special drawing rights benefitting low-income countries. “Many countries were positive towards this initiative,” she told reporters, though other countries said more technical work was needed.
And Urpilainen said the EU should be ready to go beyond the €183 million it announced last November under the IMF's Catastrophe Containment and Relief Trust for debt relief in 29 low-income countries.
“If we only look at the situation in many low-income countries, they are really fighting with the debt burden,” she said. “And we know that we need to use different kinds of tools in order to give them more fiscal space.”
The European Parliament’s development committee recently called on the commission to consider countries’ debt situations when programming its 2021-2027 development support, and to favor grant-based funding as the default option.
A commission spokesperson told Devex by email Wednesday that it would continue to monitor debt and “prioritise grants to fund public policies, reforms and service delivery, in particular for LDCs”.
Provided countries’ debt sustainability is not at risk, the spokesperson added that the new budget instrument would also enable the EU “to propose to governments very concessional loans to meet their large financing needs for green recovery and progress towards the SDGs.”
“This concessional financing will fund much needed public investments, that will generate socio-economic returns and allow for repayments over time,” the spokesperson wrote, predicting that “it may avoid situations where governments would turn to international bond markets or loans with less favourable conditions.”