Debates on the conditionality of EU funds have risen up the EU agenda and will not go away anytime soon. The issue has come to the forefront because of new rules for allocating funds within the EU, which also have important implications for the union’s external aid amid a growing trend of authoritarianism around the world.
The reforms the EU is making to ensure that internally disbursed EU funds do not bankroll democratic backsliding in member states should inform Brussels’ diplomatic agenda too. Its current funding of various authoritarian-leaning regimes overseas sits uneasily with the EU’s internal efforts to condition funds on political values and clashes with the union’s goals for international development and foreign policy.
How the EU is getting tougher on rule of law
Over the past several years, many Europeans have grown uneasy about democratic backsliding and creeping authoritarianism in some member states. As a result, European leaders agreed in late 2020 to create a new mechanism linking allotments of union funds to EU member states with those countries’ respect for the rule of law—in other words, making the transfer of EU funds to member states conditional. This new mechanism has been agreed to, although the European Parliament and the European Council have not yet passed the full budget. While a political compromise means that the new mechanism is not as strong as it should be, the EU now has a new tool that should help prevent EU funds from supporting democratic erosion within the union.
The now widely recognized, slow autocratization of political regimes around the world threatens both the EU’s founding values and its foreign policy objectives. For years, the EU has found responding to this autocratization quite difficult within Europe, particularly in Hungary. Sending EU funds to governments undermining democracy, human rights, and the rule of law compounded the problem. The new rule of law conditionality represents an attempt to improve the EU’s toolbox and to respond to these trends.
A 2019 document from the European Commission stated that “threats to the rule of law . . . challenge the legal, political and economic basis of how the EU works.” In an earlier document, the commission stressed that rule of law deficiencies have negative implications on the “functioning of the internal market as a whole” and the economy more generally. Linking respect for the rule of law to the disbursement of funds serves both the union’s political and economic aims.
The diplomatic implications of the EU’s rule of law stance
Crucially, the EU’s new conditionality mechanism has implications for the union’s external relations too. The new rule of law mechanism, along with other budgetary changes, mean that there is now a much stronger case for the EU to adopt a firmer link between democratic principles and external financial support.
Most external EU funds still go to nondemocratic regimes. In 2018 and 2019, just over 84 percent of EU funds went to authoritarian and hybrid regimes, up slightly from the previous five-year period.1 The EU remains wedded to the use of direct financial assistance to partner governments around the world; in 2020, the commission estimated that budget support “accounts for about 40 percent of [EU] national cooperation programmes with partner countries.” Since these funds go straight to partner governments, budget support operates similarly to the EU structural funds for member states now subject to rule of law conditionality. In the last decade, the EU has provided either general or sector-specific budget support to several governments guilty of significant human rights abuses such as Egypt, Laos, Morocco, Myanmar, Rwanda, Tajikistan, Uzbekistan, Uganda, and Vietnam. There is actually little overall correlation between EU external financial assistance and democracy, human rights, and the rule of law.
Just as EU member states have formally committed to adhere to democratic values by signing EU treaties, other governments around the world have pledged to uphold human rights and honor democracy commitments. The International Covenant on Civil and Political Rights, for instance, commits signatories to respect human rights and hold “genuine periodic elections.” More recently, in 2004, UN member states reaffirmed their resolve at the UN General Assembly “to implement the principles and practices of democracy,” including fundamental freedoms and support for the rule of law. Legally, it is very difficult to make any reasonable case that these values are anything but universal.
This symmetry of principles and obligations highlights the need for consistency between internal and external EU policies. Since the EU has now agreed to adopt conditionality for its own members, the union should be able to more credibly underscore the universality of these principles abroad. This should also make it easier for the EU to defend itself against other governments’ charges that Europe should get its own house in order before criticizing others. The new internal push for conditionality changes the game and puts more onus on the EU to justify why funding autocrats externally is beneficial if this practice is now questioned internally on both political and economic grounds.
It is perfectly reasonable and realistic to recognize that the EU will have different strategic priorities around the world and therefore will make differing calculations on engagement with various partners. However, variegated policy does not need to extend to direct financial assistance—foreign policy does not start and end with aid. The EU needs to be realistic about what it can achieve, but limiting foreign policy interests to financial assistance overlooks how the EU can provide country support without supporting a government directly, even as the union can engage with a government—on trade or other priorities—without financing it directly.
The perils of development first, democracy later
Critics against any strong link between democratic values and external funding commonly point out that developmental objectives like poverty reduction must be the ultimate goal of financial assistance. In recent years, others in Europe have tried to link development objectives to controlling migration to the EU. Nevertheless, in certain circles, giving primacy to development can sometimes sound like a rehashed version of modernization theory—as countries get richer, they will inevitably democratize. Development first, democracy later (if at all), the thinking seems to go.
While such viewpoints can be imminently justifiable on humanitarian grounds, they tend to overlook two important points in terms of EU support. First, they present an often unintended false dichotomy between development and democratic values. Second, direct financial assistance can have very significant and under-recognized negative externalities.
Constructing a business case for development aid to authoritarian-leaning governments usually involves invoking countries like Ethiopia, Rwanda, or Vietnam that have experienced important development gains in recent years. However, as the current crisis in Ethiopia demonstrates, the reliance on a few so-called successes is not a good basis for generalizations. Recent empirical evidence by leading scholars indicates that “democracy has a significant and robust positive effect on GDP” and, crucially, that democracies are much “better at avoiding economic crises” than nondemocracies. It is also much easier to make the case that support for democratic governance delivers on development objectives in terms of peace, public health, and gender equality. The EU does not actually face a choice between supporting development objectives or values—it can support both. At present, however, its direct financial assistance often seems to be doing the opposite.
While budget support has been shown to deliver improved performance in public finance management and to encourage greater government ownership, its use is controversial for various reasons. When a significant portion of a government’s revenue comes from nondomestic sources, that inevitably reduces state officials’ accountability to citizens, as well as resilience and sustainability in national budgeting and tax collection. Meanwhile, donors like the EU are subject to greater political risk if recipient governments engage in unpalatable behavior or siphon off funds. Budget support can also have adverse consequences for accountability in democratic systems, but such threats are notably reduced by the increased transparency and greater balance of power democracies tend to exhibit.
In recent years, the EU has recognized the risks associated with budget support for certain authoritarian-leaning countries by freezing or cutting off funds to Cambodia following rigged local elections, to Tanzania following greater restrictions to civil liberties, and to Ethiopia following the conflict in Tigray. At the same time, however, the EU has continued to offer budget support to other countries that have become more autocratic during this same period—countries like Bangladesh, Burkina Faso, Mali, and Serbia.
International donors risk propping up repressive regimes through budget support, thereby inadvertently helping to entrench authoritarianism. This is important because the EU has proclaimed that budget support aims to “build and consolidate democracies,” yet there is limited evidence that this stated commitment has been successful or has been a factor in funding decisions in any systematic manner. Because of the negative externalities, the need for overwhelming evidence of success is essential: the burden of proof must lie with those advocating budget support and not those opposing it. Supporters of a strict developmental interpretation of EU objectives would be wise to pay greater attention to making development practices more democratic and critically investigating the potential long-term harm of EU support to authoritarian regimes.
The EU’s new external funding framework
These long-running debates have presented more pressing policy dilemmas in the context of the EU’s new budget for 2021–2027. The budget’s new external funding stream—the Neighbourhood, Development and International Cooperation Instrument (NDICI)—offers significant new possibilities for improving the link between democratic principles and EU funding. The new NDICI provides the basis for rules less subject to political winds or prevailing strategic sentiment and, secondly, a welcome avenue for changing the way money can be spent. Like with the EU’s internal mechanism for rule of law conditionality, the NDICI has been agreed to in principle, though the full EU budget must still be finalized and adopted.
On the back of the rule of law agreement, it should be easier for the EU to carve values even deeper into its agreements with partner countries wishing to receive financial support, while heading off any potential requests from those partner governments for legal exemptions known as derogations. After all, the new rules mean that partner governments are no longer direct signatories to the national indicative programs under the NDICI, giving the EU more flexibility and room to maneuver if tough decisions need to be made.
If endorsed at the highest level of external action, new rules on conditionality could be transposed to procedures and agreement templates, creating greater resilience and predictability for EU diplomats when engaging with partner countries. For now, individual EU delegations are incentivized to pursue large development contracts welcomed by partner governments that provide greater local standing and visibility for the donor. Financial support is naturally a big slice of EU leverage, but as part of its new priorities as a self-described geopolitical commission, it is vital that the EU is not seen merely as a donor. This imperative has become even more important with respect to the EU’s dealings with authoritarian-leaning states.
In terms of spending, two additional features of the NDICI under the new EU budget alleviate the pressures related to unspent funds—a frequent bugbear of donors everywhere. The new NDICI incorporates elements of the old European Development Fund that allowed for the rollover of funds (a multi-annuality principle) and a large cushion of unallocated funds. This means that uncommitted money is not effectively lost and that committed but unspent funds can be used for different programs in subsequent years. The new budget also allows for greater flexibility between the different geographic, thematic, and rapid response pillars under the NDICI.
In principle, this would mean that funds that are cut off in one country based on conditionality rules can be transferred to another country. As such, the new budget will fundamentally change the calculus for EU spending decisions globally. Should funds remain allocated to a specific country, EU delegations can divert funds to international or local organizations if need be. And since funds can be rolled over, EU delegations will face less pressure to cave in to partners’ demands to restrict links to democratic values to achieve short-term spending targets. The new budget does not completely remove the procedural motives for providing direct financial assistance to nondemocracies, but it should increase the likelihood of more prudent funding decisions and the possibility of a much more consistent application of links to democratic values.
Understanding the cost of funding authoritarians
Many recent events have made it clear that the weak ways funding is linked to democracy, human rights, and the rule of law have costs for the EU’s long-term interests. The most obvious examples are when the EU supports regimes that divert funds for patronage, rig elections, or overtly engage in human rights abuses—all while eagerly spending EU aid. The difficulties now facing the EU after the troubling conduct of the Ugandan government in the wake of the January 2021 elections are a case in point. But the consequences are likely to be more far-reaching than is commonly assumed, especially given the seemingly increasing worldwide fragility of multilateralism and democracy—both central to the genetic makeup of the EU.
Notably, several pre-accession countries have made major commitments to rule of law reform in recent years. For example, the Albanian government has given EU magistrates the power to veto the appointments of judges at all judicial levels. Yet the current stalemate in the accession process seems to indicate that the only real return recipients stand to receive on this political investment has been economic aid. If other non-accession countries with questionable records on human rights and the rule of law still receive substantial aid, what is to stop pre-accession candidate countries from benefitting from similar financial support while shirking reform efforts? Applying conditionality more consistently would go a long way toward helping the EU use its leverage effectively.
Similarly, the new NDICI features a key policy drive to boost private investment for development through the European Fund for Sustainable Development, a fund designed to leverage private capital, and the External Action Guarantee, which covers sovereign and commercial risks. One would assume that, in times when corporate responsibility features increasingly prominently, private sector investors would join EU-backed ventures faster and in greater numbers if they knew that rule of law conditionality was a given—improving projects’ predictability and reducing any public relations risks. The absence of consistent links to values and the resulting political and economic costs are now recognized within the EU, and the union’s diplomatic conduct abroad is no different.
Rethinking Europe’s democratic leverage
It is irrefutably in the EU’s long-term interests to avoid directly funding authoritarian-leaning governments. This stance is more consistent with EU principles, less likely to lead to bad long-term investments, and more likely to help officials exert better leverage and influence based on these values. The NDICI has given the EU a ripe opportunity to enact such changes, but this change of direction is by no means a done deal and could be pursued incrementally—indeed, it is still hard to imagine an abrupt change in EU external policy. Supporters of conditionality are bound to be frustrated given the ongoing prevalence of humanitarian crises that require EU support and a shorter-term focus on other priorities, often pushed by EU member states. So what can the EU realistically do to create greater links between democratic values and EU funding?
For a start, EU officials must avoid a reflexive desire to link EU influence solely to money as this does the EU a disservice from the outset and wrongly conflates foreign policy with aid. Regardless of aid levels, the EU will retain a robust level of soft power and will remain a major trade partner to states in all corners of the world.
As noted above, if necessary, EU financial support need not flow directly to authoritarian-leaning governments but can be channeled to other nonstate recipients so it better reaches ordinary citizens. Direct financial support to governments guilty of human rights abuses should not be countenanced, but targeted budget support can provide a useful development tool to support reform in more open hybrid regimes. Several elements are important for this system to work better: in its programs, the EU should dramatically increase the use of variable tranches (funds contingent on certain benchmarks being reached) with a commensurate reduction in fixed tranches (money disbursed no matter what). The EU should also insist on independently verifying that recipients of variable tranches are meeting the required benchmarks, and EU officials in Brussels should make the difficult decisions on whether to disburse tranches to recipient countries to avoid undue pressure on EU delegations around the world.
Supporters of democratic values who recoil at the idea of stricter conditionality, perhaps scarred by the structural adjustment programs of international financial institutions like the International Monetary Fund and the World Bank, should be arguing more actively for greater links to democratic principles through incentives and the Sustainable Development Goals all UN member states are committed to.
The EU has used the “more for more” principle in the EU neighborhood for close to a decade—a principle that encourages reforms by offering more EU funds to recipient countries that have done the most to embrace reforms. This approach helps send so-called umbrella funds—specially reserved pools of funds—to the top reformers. The NDICI could create regional pools of funding allocated for specific priorities that states can apply to. This would help direct more funds to those who engage in more open and accountable governance. There are other avenues as well, including pressing for greater funding for domestic oversight of EU-funded, government-run projects in recipient countries or ensuring investment guarantees in countries meeting specific, pre-determined democratic criteria. The bottom line is that the nature of EU support must better reflect the nature of the partner regime.
Given the time pressures and lobbying against conditionality in the new EU budget, the December agreement underlined a broad political consensus that conditionality is in the EU’s long-term interests—and that democracy is under threat in Europe. The EU institutions would be wise to ensure stronger links between values and funding externally for the same reason, even if they choose not to make this stance the center of attention. That would be better than bragging about values and not being able to follow through. The marketplace for democratic politics is much larger than the European continent. European leaders need to recognize that dealing with the rise of authoritarian politics worldwide calls for an outward-facing projector as well as an inward-looking mirror.
Ken Godfrey is the executive director of the European Partnership for Democracy.
The author thanks colleagues from the European Partnership for Democracy, members of the European Democracy Hub practitioner group, EU officials, and Carnegie’s Richard Youngs for their valuable feedback and input.