In the past year the global economy has perhaps seen some of its worst economic growth since the beginning of the global financial crisis in 2008. No country has gone untouched. Europe has seen a significant rise in debt with much slower growth. Even the strongest European Governments have been seriously impacted by the crisis and many are responding with increased austerity measures. These measures have effects not only on domestic economic activity but can also have a profound impact on foreign economic and humanitarian aid.⁽²⁾ Slowly European nations may be forced to cut back on foreign development aid as well as humanitarian aid which could mean the difference between life and death for many struggling Africans. For those nations dependent on economic aid a reduction has the potential to slow their growth and raise, not lessen, their need for continued aid.

The ongoing crisis in the Eurozone may continue to impact every European country’s ability to meet their targets for foreign aid. This paper explores and discusses the current and potential impacts that the European debt crisis may have on the African continent.

The state of European foreign aid

The impact of the Eurozone crisis is of particular concern because the member states are among the world’s largest contributors of development aid, and many of these countries have been working toward the United Nations (UN) anti-poverty target of having 0.7% of a country’s gross domestic product (GDP) spent on aid.⁽³⁾ Members of the European Union (EU) contribute more than 50% of all global official development assistance, but in the past two years the overall development aid from Eurozone countries has decreased by 1.5%.⁽⁴⁾ Of the individual European nations providing aid, the largest three donors are the United Kingdom, Germany, and France. They provide respectively US$ 13.5 billion (0.55% of national income), US$ 14 billion (0.39% of national income), and US$ 12 billion (0.42% of national income).⁽⁵⁾ However, even these nations are beginning to feel the enormous impact of the Eurozone crisis.

The chart below from the Organisation for Economic Co-operation and Development (OECD) shows this impact through the slowing of aid from all donor countries which began in 2010. The contribution in 2010 from EU-based members of the OECD donor group, the Development Assistance Committee (DAC), was US$ 70.2 billion, about 54% of the total contribution. The OECD estimates that reduction in DAC contributions will continue well into fiscal year 2012 which is problematic because they contribute more than half of the overall aid total.⁽⁶⁾

Change in country programmable aid (figure 1) ⁽⁷⁾

At present the two countries having the strongest impact on the reduction in aid are the two that have been among the hardest hit by the debt crisis. Spain and Greece cut their budgets significantly in 2010 and 2011. Spain has reduced its budget by 30% and Greece by 40%.⁽⁸⁾ Spain perhaps has had the most impact on the reduction of EU foreign aid because it is the 6th largest donor to European aid funds.⁽⁹⁾ However, Greece and Spain are not the only nations necessarily cutting back. Too many EU countries have already cut back on their development investments in fiscal year 2011 and those that were hit the worst by the crisis are cutting their foreign aid budgets by as much as 40%.⁽¹⁰⁾

Impact on Africa

A major fear of the impact of the Eurozone crisis for Africa’s leaders is what it will mean for the continent’s poorest economies. A report from the Overseas Development Institute (ODI) identifies risk factors for those developing countries that are likely to be impacted the most by the crisis. Those are the countries which “direct a significant share of their exports to European crisis-affected countries; export products with high income elasticities; are heavily dependent on remittances, foreign direct investment, cross-border bank lending and aid flows from European countries; [and] have limited policy room to counter the effects of the crisis.”⁽¹¹⁾ The report also finds that there will be a significant drop in funds to the developing world, which may see a loss of around US$ 238 billion in the next two fiscal years.⁽¹²⁾

In the ODI report, author Isabella Massa notes that Mozambique, Kenya, Burkina Faso, Mali and Niger are among those countries that will feel the worst effects of the crisis. They depend heavily on aid and are also hurt fiscally through the depreciation of the Euro.⁽¹³⁾ For example, according to Massa, “Mozambique is among the most vulnerable countries owing to its high dependence on euro zone trade flows and cross-border bank lending from European banks. It is also highly dependent on aid and has a significant fiscal deficit which has worsened since the global financial crisis.”⁽¹⁴⁾ Mozambique is just one example of the many developing nations economically impacted by the crisis. The slowing of economic progress for countries like Mozambique is troubling because, as they require aid to continue growing, the setbacks created by the crisis will only double their need for development aid, creating an inescapable cycle of dependence.

Aid to the African continent is also more than just fiscal, it is life-saving. There is a growing food security crisis throughout Africa. Aid organisations like Save the Children have been very vocal that now is a critical time in Africa because of this devastating hunger crisis, particularly in West Africa where 1.5 million people are in urgent need of assistance.⁽¹⁵⁾ The charity also notes that it is not just Africa that is at risk but “that up to six million more people worldwide could go hungry as a direct result of the global economic crisis.”⁽¹⁶⁾ It is a growing concern that as austerity measures increase and investment and trade in Europe fall, more and more of people most in need will go hungry by the end of 2013.⁽¹⁷⁾

The future

Currently there is continued discussion about the ongoing potential impact the Eurozone crisis will have globally and on Africa. The World Bank has provided a scenario for what could happen at worst case. For example, if Italy and Spain were not able to repay their debt or be bailed out that would create a rapid fall in economic growth in developing nations, one effect of which will be that millions of people will go without food.⁽¹⁸⁾ These predictions seem justified because, at present, the growth rates of many emerging economies are already slowing down in the wake of the crisis in Europe; these include the economies of China, India, Brazil, and Russia.⁽¹⁹⁾ It has also been reiterated that now is the worst time for aid to be decreasing because, as progress in poverty reduction and improving economic stability is being made all over Africa, aid is proving to be an effective development mechanism.⁽²⁰⁾ It is also a critical period because even though progress is being made there are still millions in need.⁽²¹⁾ Presently European Governments are negotiating budget proposals for the remainder of the decade. Their budget includes roughly € 51 billion (US$ 62 million) for development, but some countries are calling for a reduction in that budget.⁽²²⁾

It appears there will be an ongoing battle between those who feel the need to protect their country’s interests and those who are still committed to providing development aid. There are some ongoing arguments from aid opponents that aid is simply overused and may really just be a crutch for poorly governed countries to lean upon.⁽²³⁾ Despite fear about what the crisis will bring and in spite of opposition, there are those like the United Kingdom that still remain on track to provide their development aid provision targets.⁽²⁴⁾ This provides a hope that even in the worst case scenario presented by the World Bank countries in the EU will still attempt to meet the challenge in tough economic times of providing aid to those who need it most.

The hope for the future is that aid will continue to help African countries grow economically and socially. Proponents of aid cite Ghana as a clear example of how aid can help a country develop. They note that the country has received a great deal of funding over the years and through good leadership and coordination it has improved its economic growth enough to almost end its need for development assistance.⁽²⁵⁾ The EU continues to debate about austerity versus growth in this time of crisis, but the strongest argument is that leadership should take a long-term view of the issue.⁽²⁶⁾ The more investment that is made the stronger more vulnerable countries will become, and if African economies continue to grow, that growth will open up wonderful opportunities for investment and trade that will only strengthen Europe’s own economic growth.⁽²⁷⁾

Concluding remarks

The global economic crisis continues to threaten growth worldwide. Developing countries are still the most at risk both fiscally and socially. The Eurozone debt crisis in particular has far reaching implications not just in Africa, but globally. European funds account for a significant portion of the world’s development aid, and as donors like Greece and Spain struggle to support their own economies, the Eurozone debt crisis will continue to impact the African continent. The impact of the crisis and a reduction in development and humanitarian aid could mean that millions in need will go hungry and that nations dependent on aid will experience a slowdown in their economic progress.

However, there is still a chance, in spite of the crisis, for countries to step forward and facilitate continued progress. Many EU countries are still on target to meet aid goals for 2012 and this is vital to keeping vulnerable African nations moving forward towards stability and meeting their development targets. It would be prudent to ensure that Africa remains a priority for continued development because its prosperity will mean a new outlet for the rest of the globe to expand and grow their own economies through taking advantage of the opportunities for trade and investment that Africa holds.

Written by Shannon Rupp ⁽¹⁾

NOTES:

(1) Contact Shannon Rupp through Consultancy Africa Intelligence's Africa Watch Unit (africa.watch@consultancyafrica.com).
(2) Kganyago, L., ‘The Impact of the Euro zone Financial Crisis on African Economies’, Nepad Business Foundation, 17 April 2012, http://www.resbank.co.za.
(3) Doyle, M., ‘Eurozone Crisis Causes Aid Cuts to Poor, Report Says’, BBC News, 24 June 2012, http://www.bbc.co.uk.
(4) Ibid.
(5) Ibid.
(6) Cukier, J., ‘Development aid to slow’, OECD Fact blog, 5 May 2011, http://blog.oecdfactblog.org
(7) Ibid.
(8) Elliot, L., ‘Euro zone Austerity Hits World’s Poor as Europe’s Aid Falls by €700m’, The Guardian, 25 June 2012, http://www.guardian.co.uk.
(9) Doyle, M ‘Eurozone Crisis Causes Aid Cuts to Poor, Report Says’, BBC News, 24 June 2012, http://www.bbc.co.uk.
(10) McDonald-Gibson, C., ‘Euro zone Crisis Leads to Drastic Cuts in Development Aid’, The Independent, 25 June 2012, http://www.independent.co.uk.
(11) Massa, I., Keane, J. and Kennan, J., ‘The Euro zone Crisis and Developing Countries’, Overseas Development Institute, May 2012, http://www.odi.org.uk.
(12) Ibid.
(13) Ibid.
(14) Ibid.
(15) McDonald-Gibson, C., ‘Euro zone Crisis Leads to Drastic Cuts in Development Aid’, The Independent, 25 June 2012, http://www.independent.co.uk.
(16) Ibid.
(17) Ibid.
(18) Ibid.
(19)Hughes, H., ‘Mozambique: Euro Zone Crisis Threatens Mozambican Economy’, All Africa, 22 June 2012, http://allafrica.com.
(20) Gotev, G., ‘Campaigner: Crisis Dwarfs EU’s Development Aid’, Euractiv, 25 June 2012, http://www.euractiv.com.
(21) Ibid.
(22) Elliot, L., ‘Euro zone Austerity Hits World’s Poor as Europe’s Aid Falls by €700m’, The Guardian, 25 June 2012, http://www.guardian.co.uk.
(23) Doyle, M., ‘Eurozone Crisis Causes Aid Cuts to Poor, Report Says’, BBC News, 24 June 2012, http://www.bbc.co.uk.
(24) Elliot, L., ‘Euro zone Austerity Hits World’s Poor as Europe’s Aid Falls by €700m,’, The Guardian, 25 June 2012, http://www.guardian.co.uk.
(25) Doyle, M., ‘Eurozone Crisis Causes Aid Cuts to Poor, Report Says’, BBC News, 24 June 2012, http://www.bbc.co.uk.
(26) Gotev, G., ‘Campaigner: Crisis Dwarfs EU’s Development Aid’, Euractiv, 25 June 2012, http://www.euractiv.com.
(27) Ibid