Is Europe entering an era of aid austerity?

In the wake of the U.S. debt deal which, by all accounts, will result in significant cuts to American overseas assistance spending, many are wondering to what extent the foreign aid austerity contagion will spread. Most eyes are now on Europe which is undeniably beaten and battered coming out of the first wave of the global economic recession and could actually be the driving force into another downturn. A Washington Post article recently summarized the Eurozone’s political economy, saying “Confidence in the health of the region’s banks is falling, economic growth is slowing, and governments are so hamstrung with debt they will have little room to respond with new stimulus or other programs.” In an official paper, the Institute of International Finance has called Europe’s future challenges “intractable.” In search of ways to contain these major fiscal challenges, governments across the world, including those in Europe, are re-evaluating their official development assistance commitments. The Organization for Economic Cooperation and Development is already predicting only 2 percent annual ODA growth from 2011 to 2013, down considerably from the average 8 percent growth over the course of the last three years. The combined share of bilateral aid from the OECD Development Assistance Committee – a forum comprised of the world’s major donor countries – is projected to increase at an even slower rate of 1.3 percent per year. Fifteen of the 23 DAC countries are European. Defined as government spending on bilateral development partnerships or contributions to multilateral donor organizations, ODA commitments are typically set and tracked as a percentage of a country’s Gross National Income (GNI). In order to achieve the Millennium Development Goals, the 2005 Paris Declaration on Aid Effectiveness reasserted developed countries’ commitments to set aside 0.7 percent GNI for ODA. In today’s tough financial times, the target appears to be moving further away, if not slipping entirely out of reach, for much of Europe. France, Germany, Italy, and Spain failed to meet OECD agreements to reach ODA levels of 0.56 percent of GNI by 2010. Budgetary constraints have forced Italy and Spain, in particular, to make drastic cuts to foreign aid spending. Economic pressures led to France cutting its donations to U.N. humanitarian agencies and the International Committee of the Red Cross by €55.1 million ($77.9 million) in 2011, representing a 21 percent decrease from the previous year. Germany, despite emerging from the financial crisis better than its European partners, is bracing for deep austerity measures proposed by the Merkel administration: approximately €80 billion ($112.5 billion) in cuts by 2014. While the Federal Ministry for Development Cooperation, or BMZ, reports a 2.5 percent increase in the 2011 budget, there will reportedly be a 10 percent reduction in the ministry’s budget in 2014, and other aid-focused ministries expect a 14 percent to 29 percent decrease in their budgets. Even Denmark, which maintains one of the highest levels of ODA as a percentage of GNI, intends to cut aid spending from 0.9 percent in 2010 to 0.82 percent of GNI in 2011, with more cuts likely to follow. The Danish government plans to decrease ODA budget levels further to 0.79 and 0.77 percent of GNI by 2012 and 2013, respectively. Of course, ODA reductions result from political decisions and, as they say, all politics are local. Indeed, there is some evidence that public opinion is dictating ODA cutbacks in Europe and even though Europeans appear to appreciate the moral imperatives behind foreign aid, some societies are willing to sacrifice aid spending overseas to shore up economies at home. It will be interesting to see how these political dynamics evolve as the socio-economic volatility continues. In the Netherlands, for example, the Liberal Party rose to power in 2009 due to the popularity of its austerity agenda, which aimed to decrease ODA by 6 percent or €400 million ($565.2 million) by 2011. The new Dutch coalition government plans to reduce ODA spending from 0.81 percent of GNI in 2010 to 0.76 in 2011 and 0.71 percent in 2012. There are some counterexamples. In the U.K., recent public opinion polls show that 56 percent of individuals believe that their country is spending too much on aid, while 80 percent say that the government should deal with domestic issues rather than send aid overseas. In the face of these sentiments, however, the U.K. government has stayed the course and promised to boost foreign aid spending significantly over the course of the next several years. Furthermore, despite facing strict spending caps, Sweden, Luxembourg, and Belgium remain committed to maintaining promised aid levels. Norway and Sweden are setting the example for the DAC countries in their continued commitments of ODA spending set at 1 percent of GNI. Generally, countries which have reached the OECD benchmark of 0.7 percent of GNI, including the Netherlands and Denmark, have earmarked enough in the near to mid-term to ensure that ODA budgets consistently hit above the 0.7 mark even if they are still declining. Click here to view the image in larger size. While assessing each country’s status vis-à-vis the 0.7 percent target is helpful to understand European aid trends, there are still valid questions about what all this means for European ODA volumes over time. In an effort to add to the debate, the Devex team has made its own projections of actual European ODA spending through 2013 by researching and crosschecking each country’s GNI figures and growth estimates with their ODA disbursements, commitments, and proclamations. Based on our own analysis of the top ten European DAC countries by ODA volume, it appears that total aid spending from 2008-2013 peaked in 2010, will drop significantly in 2011, and will remain low through the 2012-2013 time frame (see chart on top). Worse, most foreign aid analysts and economists we consulted suggested that as the second wave of the global economic crisis hits, European growth and aid projections of today are probably optimistic. Aileen Cruz and Christine Dugay contributed to this report.