Why Is the EU Still Giving Grants to Countries that Could Borrow? Rethinking EU Budget Support Ahead of the 2028-2034 MFF

Budget support—providing funds directly to partner governments to be spent through national budgets—is a cornerstone of the European Union’s external action toolkit. In 2023, the EU managed €11.1 billion in active budget support programmes, making it one of the largest providers globally. The provision of budget support strengthens partner country systems, anchors reform dialogue, and reinforces institutional capacity.

But a significant share of the EU’s grant-based support is directed toward countries that could take out concessional loans instead. These are countries that retain market access and are at low or moderate risk of facing debt distress. In a context of tighter fiscal space and increasing geopolitical demands on the EU budget, this warrants reconsideration. Our new study, conducted in partnership with Lion’s Head Global Partners, examines how better calibrating the grant–loan mix could significantly increase financing capacity and development impact under the next Multiannual Financial Framework (MFF), without expanding the overall budget envelope.

Why budget support matters

Budget support differs fundamentally from project finance. By channelling resources through national treasuries and linking disbursement to agreed reform priorities, it:

• Strengthens domestic public financial management systems
• Ensures policy dialogue happens at senior political levels
• Enhances country ownership and institutional resilience
• Supports macro-fiscal stability in fragile environments

Within the EU framework, support is provided through grant-based programmes and through loan-based Macro-Financial Assistance (MFA), formally designed for balance-of-payments support.

As geopolitical competition intensifies and the EU seeks deeper strategic partnerships, preserving the credibility and effectiveness of budget support is essential.

The allocation misalignment

Grants are the EU’s most concessional and scarce resource. They should be prioritised where borrowing is constrained or risky.

However, our analysis shows that:

• The majority of EU grant-based budget support flows to countries assessed at low or moderate risk of debt distress;
• Creditworthy countries receive nearly double the allocation of non-creditworthy countries;
• Countries at higher risk of debt distress appear underrepresented in grant allocations.

The result is a structural inefficiency: scarce grant resources are used where concessional loans could suffice, limiting the EU’s ability to support fiscally constrained partners and reducing overall leverage.

Figure 1. EU budget support 2023 allocation per risk of debt distress, EUR million

Source: European Commission. (2023). EU budget support – Trends and results 2023 (Directorate-General for International Partnerships & Directorate-General for Neighbourhood and Enlargement Negotiations). European Commission.

Figure 2. EU budget support allocation per creditworthiness, EUR million

Creditworthy countries receive nearly double the allocation compared to non-creditworthy peers.

Source: European Commission. (2023). EU budget support – Trends and results 2023 (Directorate-General for International Partnerships & Directorate-General for Neighbourhood and Enlargement Negotiations). European Commission

The regional bias

Since 2021, more than 75 percent of EU grant-based budget support disbursements have gone to the Southern and Eastern Neighbourhoods, with a sharp uptick in the East driven by support for Ukraine.

While the Neighbourhood’s strategic importance is clear, average portfolio sizes per country are now three to seven times larger than in other regions. Engagement in sub-Saharan Africa and parts of Asia remains comparatively fragmented and limited in scale. This concentration constrains geographic balance and reduces the EU’s capacity to deploy budget support as a genuinely global instrument.

Figure 3. EU budget support portfolio evolution over time across regions, EUR million

Five reform models to make EU budget support work harder

Our study outlines five reform models that could rebalance the EU’s grant and loan mix and strengthen its financial architecture. These models demonstrate how:

• Loan-capable countries could transition progressively toward concessional loan-based support
• Grants could be preserved for partners facing tight fiscal space or elevated debt risk
• Differentiated levels of concessionality could be applied according to country context
• Blended configurations could improve leverage while maintaining safeguards

Figure 4. Overview of the different models

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These models are not mutually exclusive and can be adapted to institutional and political constraints. Importantly, financial modelling shows that reallocating grants toward more fiscally constrained countries, while shifting loan-capable partners to concessional lending, could significantly expand total financing capacity without increasing the MFF envelope.

A window for reform

The 2028–2034 MFF negotiations offer a rare opportunity to align the EU’s financial instruments with fiscal realities and geopolitical priorities.

As Member States face mounting domestic budget pressures, external financing must demonstrate both development impact and strategic coherence. Improving the calibration of the EU’s budget support toolkit would:

• Increase financial leverage;
• Enhance predictability for fiscally vulnerable partners;
• Improve geographic balance;
• Strengthen the EU’s credibility as a strategic and effective development actor.

In a tighter budgetary environment, the central question is no longer how much the EU spends, but how effectively it deploys its instruments. The next MFF provides the moment to ensure that EU budget support is both fiscally responsible and developmentally transformative.