Reform of the international financial architecture is urgently needed, if developing countries are not to lose out from even more reductions in aid

Earlier this month, the European Commission released the latest in its annual series of Accountability Reports on financing for development, and also issued a 'communication' setting out proposed follow-up actions.

Whilst the support for domestic resource mobilisation is welcome, the report still makes pretty grim reading - with few concrete actions promised in key areas.

OECD figures had already told us that EU aid decreased in 2011 from €53.5bn to €53.1bn, a reduction of €342 million. Based on current figures the report notes that by 2015 EU Official Development Assistance is expected to increase to 0.44% of national income.

This means that the EU continues to be way off track on its commitment to meet the 0.7% of national income aid target by 2015, having already failed to meet its pledge to get to 0.56% by 2010.

The picture gets worse when you consider that much of the money counted as ‘aid’ is questionable. The recent EU AidWatch report estimates that the real ODA figure should be lower as 'in 2011 at least €7.35 bn (or 14%) of EU ODA was not invested in developing countries'.

Although in June the European Council 'reaffirmed its commitment to achieve development assistance targets by 2015', the accountability report underlines the scale of the EU’s broken promises, noting dryly that there is 'a delay equivalent to about 25 years on the path to 0.7%'.

Rather than proposing ways to get EU governments to meet their commitments, the communication raises the prospect of using dubious accounting methods to further inflate ODA figures. It asks the OECD development assistance committee to develop 'a clearer understanding of how the concessional character of loans is determined in accounting for ODA'.

More EU member states have committed to using country systems, something underlined by the Council  in May. The communication, however, makes no mention of this. Instead, it focuses on country-led results frameworks which, however promising,  have yet to be effectively implemented.

Importantly, the accountability report expresses concern about new vulnerabilities and risks regarding developing countries’ debt sustainability. The Commission rightly highlights developing countries’ increased vulnerability to external shocks.

These include rising lending from new private and public creditors and more frequent use of lending mechanisms: all key challenges to debt sustainability in developing countries. However the communication presents solutions that do not fully respond to the problems.

There is a positive emphasis on the need for responsible lending and borrowing practises. But this rhetoric needs to be followed with action.

The Commission should use all opportunities to put its continued commitment to responsible lending into practice: for example, the development of the EU Platform for External Cooperation and Development and the implementation of new EU regulations under which the European Commission will make its first report on Export Credit Agencies’ activities.

However, the communication has little to say about how to cope with any future crises. While the report rightly stresses that developing countries now engage a wider range of private and public creditors (and that this broad creditor base creates challenges in terms of efficient debt workout once a crisis hits) its proposal to 'push for the participation of non-Paris Club members in debt workout settlements' does not offer any lasting or efficient solution.

Any such solution would need to gather all creditors in one single debt workout process where decision-making is independent of the creditors. Eurodad has developed 10 principles that should form the basis for such a procedure.

Our members have been pushing for all EU states to adopt strong laws against vulture funds that have preyed on developing countries – a demand picked up by the Commission, which calls for member states to take national action to restrict litigation against developing countries.

When it comes to taxation, some of the Commission rhetoric is welcome, particularly the view that domestic revenues tend to be the most important source of development finance directly available to governments - and its acknowledgement of the crucial role of good tax systems and tax collection capacities in domestic revenue mobilisation. It is encouraging that the Communication also points to the devastating development impacts of illicit capital flight.

However, while developing countries must enact solid tax systems and regulatory measures, it is crucial not to ignore the EU and member states’ responsibility to allow developing countries the necessary policy space to do so, and to create solid regulatory frameworks to close the many loopholes that allow EU businesses to dodge taxes in developing countries. In this context it is disappointing that the action points do not include any regulatory measures and fail to make any strong statement on key opportunities.

The EU should use ongoing legislative procedures to match their words with action. The EU transparency and accounting directives are a vital opportunity to introduce full country by country reporting for all companies. And the ongoing review of the anti-money laundering directive should make handling the proceeds of tax evasion an automatic money laundering offence and require that financial institutions make sure they know who they are doing business with.

Meanwhile, the trend towards using development finance to support private investment continues, something that Eurodad has critiqued. The suggestion that the EU make greater use of risk-sharing mechanisms and 'promote investments through instruments that entail improved risk management and equity participation in structured funds' brings us further down the road towards linking development finance to international capital markets.

The Commission continues to push the Council to adopt a financial transaction tax. Although recent Council conclusions indicate that an EU-wide FTT is unlikely, they have given permission for a coalition of the willing to go ahead anyway, a move we strongly support.

However, moves to capture all FTT revenues for the Commission itself – rather than share them between development, international environment and domestic revenue, as the Robin Hood tax campaign and others  have long demanded - are less welcome.

The argument that this could free up other resources 'which could in turn make it easier for member states to mobilise funding required for meeting aid targets and tackling other global challenges' is unlikely to cut much ice with campaigners.

Major changes are needed to the international financial architecture to address these problems - but this does not  seem to figure large in the European Commission's thinking.

This blog is based on a post published by Eurodad, the European network on debt and development. It is jointly authored by director Jesse Griffiths, with Oygunn Brynildsen, Alex Marriage and Jeroen Kwakkenbos