Opinion: Aid cuts in US, UK, and beyond mean EU institutions must step up

The sudden and brutal dismantling of USAID signals twin realities of public development funding within a rapidly changing landscape — and an opportunity for reform. First, it highlights the undeniable value of official development assistance, or ODA. Essential for global solidarity, cooperation, and shared responsibility, ODA has helped eradicate diseases, lift millions out of poverty, and respond to humanitarian crises. In 2023, it reached $223.7 billion — though still below the United Nations’ target of 0.7% of gross national income, which was met by only five countries. Second, it shows how development funding must evolve. Overlapping crises — climate shocks, economic inequalities, financial gaps — hit the fastest-growing but most underfunded economies hardest. Climate finance needs in lower-income countries are fivefold higher than current levels, with adaptation alone requiring $387 billion annually until 2030. Meanwhile, a significant portion of ODA funding goes to short-term humanitarian and geopolitical crises, leaving long-term development underresourced. The international development community now reels from funding freezes and mounting pressure on governments to prioritize defense and domestic spending over international aid. Recent aid cuts threaten climate finance, with budgets shrinking even as wealthier nations pledged to scale up funding. This presents a moment of reckoning — to take stock and work on reform within the overall aid architecture, ensuring continuity of the substantial development gains made over recent decades that have benefited us all, regardless of where we live. An opportunity to act Opportunity now surfaces amid the current crisis to reinforce the connections and relationships across different groups along an impact capital continuum, moving beyond traditional aid alone. European Union institutions have an opportunity — and responsibility — to step in. Increasing global development engagement is both ethical and strategic, particularly for trade-dependent European nations. Frontier market contexts are set to expand by 4.2% compared to 1.8% in high-income countries, presenting immense opportunities for economic growth, innovation, and job creation. Cooperation must prioritize employment, climate resilience, and shared prosperity. “It’s time to move past outdated models and build a financial system resistant to short-term political whims; one that enables long-term, sustainable growth.” --— The way forward is in a coordinated approach, which blends different financing mechanisms and a commitment toward global cooperation. An example of this is Team Europe’s commitment to mobilize up to €300 billion between 2021 and 2027 for sustainable, high-quality projects. By ensuring lasting benefits for local communities and creating opportunities for EU member states’ private sector, this approach strengthens global competitiveness while upholding the highest environmental and labour standards. The challenge remains, however, that viable investment opportunities for development finance institutions, or DFIs, and public development banks, or PDBs, to close the traditional aid gap are not being originated fast enough, with grant money and technical assistance facilities not proving to be catalytic enough. In particular, the early-stage investment bottleneck in frontier markets is largely due to high risk, fragmented ecosystems, varying determinants for a low demand for investments, low levels of creditworthiness, and small deal sizes. Need exists to create an environment where private capital can flow into these markets by addressing financial roadblocks. Tools like first-loss guarantees, results-based financing, and concessional capital must be used at scale to absorb early-stage risks and attract institutional investors. Without a pipeline of investment-ready businesses, DFIs and PDBs struggle to attract private investors, making large-scale capital mobilization nearly impossible. Many businesses in high-growth economies require midsized investments but fall between the cracks — too big for microfinance, too small for traditional development finance. In least developed countries, or LDCs, a subset of frontier markets, most small and medium-sized enterprises need investments starting at €500,000 or less, which is often unviable for DFIs. Additionally, with investment opportunities smaller and further from commercial viability, using blended finance to induce private co-investment in these contexts has not always been seen as an efficient use of resources. A deepening cycle of underinvestment is making the problem worse, particularly with rising debt. Without urgent changes in how financing is structured, these markets will remain locked out of global investment opportunities, reliant on repeat cycles of small grant funding which increasingly needs to be reorientated to fragile, conflict- and violence-affected contexts where we witness rising humanitarian needs and levels of extreme poverty. The way forward with blended finance Blended finance, then, is an important part of the impact capital continuum. This year will be critical in shaping the next decade of development finance policies. These partnerships bring cohesion between public policies and private investment by supporting businesses and infrastructure that make these markets more investable. The challenge, however, which confronts valid criticism, is that many private sector development programs operate in silos and fail to generate the strong pipeline that DFIs and impact investors need. Aggregation models can address a lot of these concerns — helping to bridge the investment gap by pooling smaller projects, thus lifting investor confidence and scalability. There has been important work in this direction. Initiatives such as the Africa Resilience Investment Accelerator, Invest for Impact Nepal, and the Dutch Fund for Climate and Development, or DFCD, are examples of initiatives that work toward creating investment opportunities in fragile contexts. Collaboration between donors, DFIs, and private investors, along with implementing organizations has been essential for unlocking the necessary financing for climate solutions. By leveraging public funds, private capital, and technical assistance, these models can ensure diversified portfolios and systemic change. The DFCD Origination Facility, for instance, supports early-stage projects to become investment-ready. It is born out of a resilience fund supporting climate adaptation and mitigation projects for vulnerable communities and landscapes. These models can be replicated across high-growth economies. Instead of financing isolated projects, investments should be designed to build entire markets — boosting productivity, diversifying economies, and strengthening local resilience. The crisis of ODA in freefall presents an opportunity to rethink development finance for the next decade. It’s time to move past outdated models and build a financial system resistant to short-term political whims; one that enables long-term, sustainable growth.