Europe needs swagger

Why European countries give more aid than others

The best-known philanthropists may herald from the U.S., but the leading European nations send far more aid overseas in proportion to the size of their economies.

While the U.S. is much the biggest provider of overseas development aid (ODA) in absolute terms — sending $32.2 billion abroad in 2014 — it falls behind if its aid is considered as a proportion of gross national income (GNI) — a measure that aggregates gross domestic product (GDP) with income obtained from abroad.

"Europe has a long, if occasionally somewhat troubled, history of being strongly engaged in global affairs — aid and development is a part of this," Bond, a network of over 400 international development organizations and the U.K. Aid Network, said in a statement to CNBC this week.

German volunteers from Traunstein in Germany dispatch humanitarian aid to a group of refugees.
Falk Heller | Anadolu Agency | Getty Images

One facet of this engagement is that in 2005, 15 European Union (EU) countries signed up to a United Nations target of raising ODA to 0.7 percent of national income by 2015.

In contrast, the U.S. did not adopt the target, stating that it did not subscribe to specific targets or timetables.

"As the EU by its nature brings so many countries together, it often jointly bats above its weight by working as a group… This helps to reinforce the political will needed to deliver aid and keep delivering," said the statement from Bond and the U.K. Aid Network.

Although only five countries — the U.K., Denmark, Luxembourg, Norway (not in the EU) and Sweden — met the goal in 2014, the focus on the target has still pushed them ahead of the U.S., where ODA/GNI remained at under 0.2 percent last year.

"The EU is basically the only bloc of countries that promised to reach the GNI target of 0.7 percent… I think what is different about the EU is that they set a deadline," Tamira Gunzburg, the Brussels director of ONE, an international anti-poverty organization, told CNBC.

ODA remains contentious, with critics saying that it can serve to further donors' rather than recipients' needs or create dependence. Others say that richer countries may lack insight into the needs of recipients or that aid can be misused by beneficiaries. However, aid can provide a lifeline for countries facing humanitarian crises or too impoverished or unstable to attract private funding.

As part of the explanation as to why Europe gives proportionately more ODA, Gunzburg noted that countries with bigger welfare states — like those for which the Scandinavian nations are famed — tend to pay higher taxes, leading to more government revenue that can be spent on aid.

For instance, in Sweden — which had the highest ODA/GNI ratio in 2014 of 1.1 percent — those on the biggest wages pay national income tax of 25 percent and municipal income tax of around 32 percent. These rates are levied on anybody earning 616,100 Swedish krona ($74,991) or more.

By comparison, in the U.S., the highest federal tax rate of 39.6 percent is only levied on single filers earning $413,201 or more. An additional state tax is also imposed, which for the highest payers varies between roughly 3 percent and 12 percent, with federal income tax deductible in some states.

European countries' proximity to the Middle East and Africa and their long-standing ties to former colonies also help drive aid overseas.

Notably, Syria's descent into civil war has seen around 150,000 people claim asylum in the EU and highlighted the incentive for European nations to work for stability and prosperity in bordering countries. Last month, for instance, the U.K. pledged a further £115 million in additional emergency funding for Syria, in part to deter more Syrians from attempting the risky journey to Europe.

"These are our neighbors (not just in Syria, but the Middle East and Africa as a whole), so it makes sense for there to be stability and prosperity in countries that surround us and with which we need to do business," Gunzburg told CNBC.

European countries also give disproportionately to their former colonies. In 2013, for instance, 16 out of the 20 countries that received the most bilateral aid from the U.K. had colonial ties, with the former colony of Pakistan the top recipient.

France's ODA, meanwhile, is slanted towards its former colonies in Africa, with the Cote d'Ivoire and Morocco among major beneficiaries.

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"Overseas Development Aid from Europe is still focused on former colonies, but it is becoming less and less biased… Colonial links are very strong; it is incredible how strong still are, given the years that have passed," Ravi Bhatia, a director at Standard & Poor's who specializes in Africa, told CNBC this week.

However, some development organizations fear that previously committed European countries are losing sight of their bid to increase ODA/GNI.

For instance, the Netherlands allowed ODA/GNI to fall below 0.7 percent in both 2013 and 2014, having previously held above this level since 1975. Denmark has also cuts ODA/GNI from a peak of 1.06 percent in 2000, although the ratio remains above the targeted 0.7 percent.

Gunzburg attributed these changes in part to the rise in populist and anti-immigration politics in Europe in the wake of the 2007-08 global financial crisis.

"I think it is the uprising of extreme-right politics — not that these parties are actually in power, but they can pull to the right centrist parties that are worried about losing voters," she told CNBC.

"Development budgets have been very susceptible from right-wing governments, but also from all governments — for instance, France's socialist government has cut spending," she later added.

— By CNBC's Katy Barnato. Follow her on Twitter @KatyBarnato.