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Thursday, August 29, 2013

The EU budget is a disaster that cannot save Greece

Our Director Mats Persson argues on his Telegraph blog:
Ever driven on a motorway in Spain or Portugal? You’ll notice it’s not exactly the M25 – often, cars are few and far in between (some pretty heavy congestion around Gibraltar not included).

According to some estimates, 25 per cent of the EU’s so-called regional funds in Portugal has been invested in roads, heavily contributing to a ridiculous situation where the country has 60 per cent more kilometres of motorway per inhabitant than Germany and four times more than Britain (H/T FT). Meanwhile, around one third of EU structural funds in Spain has been invested in infrastructure, further inflating an already critical construction bubble, while, like in Portugal, creating a whole host of ghost roads, airports and harbours. The EU’s own auditors have hammered EU spending on roads, noting that 74 per cent of the project they monitored in a recent investigation recorded less traffic than expected.

Welcome to the folly of the EU budget. This economic anomaly is at best irrelevant for the Eurozone crisis – at worst outright damaging.

Consider Greece. In the last week, there has been some talk of the EU budget being used in a third bailout for Greece. Although it’s not entirely clear how this could work – or how even how credible this speculation is – one way could be to reduce the amount of its own cash the Greek government needs to put up in order to unlock EU funds, known as co-financing. Depending on the circumstances, this usually ranges between 25% and 60% of a total grant. Greece currently has special permission to put up only five percent, and it wants this extended to the next EU budget period, to run between 2014 and 2020.

This is politically convenient since it draws from a cash allocation that has already been agreed (easier to sell to German taxpayers) while not coming with new, tough bailout conditions (easier to sell to Greek citizens). However, such an arrangement will also do absolutely nothing to save Greece:
  • Most fundamentally, a quick look at the records shows that Greece has been allocated over €64bn in structural funds over the last two decades (to which the UK has contributed around 12%). Per capita, this is amongst the highest in the EU, yet the country is still bust and uncompetitive. 
  • It follows therefore that it’s the wrong type of funding for Greece. It can’t be used for health spending, education or to recapitalise banks, for example, areas where the fiscal shortfall in Greece is / has been the most critical. It can, however, be spent on roads. 
  • Like the structural funds in general, it risks creating an opportunity cost by diverting limited public investment away from where it can have the greatest impact. 
  • Reducing the co-financing rate gets us away from the structural funds actually being a fiscal burden – Greece can’t afford putting up the matching cash (the structural funds tend to be oddly pro-cyclical). However, the trade-off is that it eliminates any form conditionality attached to the money. Is this really the way forward? 
This also illustrates why (almost) the entire EU budget is pretty much a running disaster, in desperate need of root-and-branch reform.

10 comments:

Rik said...

1. Just move from an inconvenient bail out procedure to an inconvenient budget one. Solves one (well doubtful, you will eg get a legal challenge in Germany and with a higher downside risk. As it is completely clear that this is getting around parliament). Plus bring up the discussion in non-EU states like the UK and Sweden.
Furthermore in other subsidy basketcases like Poland (if the cash is already spent in Greece it cannot be spent anymore in Krakow).

2. Highways can relatively easy be researched on potential use. What I have seen is that even for me it was clear that the no of cars a day would be way lower than the borderline in which usually a highway viable.
Simple complete mismanagement and on 2 levels. national as well as EU. For Portugal and Spain probably related to political influence of a large company specialised in roadconstruction ( the one that makes stuff suited for freezing weather).

3. There are disasters and there are challenges and usually they come together.
Will be a great opportunity for the UK to start all over on the budget (and decisionmaking in Euroland EU as well btw). Very likely they will have a lot more supporters than last time, basically all non EZ. For different reasons but nevertheless. Plus a few others also for different reasons.

4. Next to being a PR disaster getting around approval procedures is all over the European newspapers now. Messrs Wilders and Farage (plus several others) will be thankful for that.

Rik said...

Keep an open eye for Greece's social fund btw.
Last year it had a shortfall of something like 1.3 or 1.4 Bn. This was not included in the national budget. At present it is unclear who will have to pay that the present proposal from the Greek side says Germany but these are acting a bit like party bloopers in this respect.
And subsequently in the calculation for primary surplus, and future financial needs, debtlevels and Bail out 4.0 needs.
Hard to see that over a longer period this will not come up again.
As I see it when it will start to play again the amounts will be of a size that the 10 or so Bn are easily burnt before they are supposed to be.

Problem with Greece is it has a completely failed businessmodel. If that is not changed the situtaion is unlikely to improve. They need a lot more change than only a new currency thart can be devaluated and budget assistance. Nobody is going to invest in a country where you have to pay 50% or more of your income in all sorts of taxes and get nothing but red tape and nationwide protests for that in return. Things donot work that way.

Anonymous said...

Schaeuble and Kauder two of Merkel's closest allies have made it very clear in the German press that they want EU structural funds to be used (at least partly) for the next round of Greece's bailout. So unless a non-Eurozone heavyweight like the UK vetoes this, the German government (assuming the Merkel remains in office) will push forward with this strategy and I don't expect Barroso or van Rompuy to interfere with Merkel. Whether the use of these funds is helpful or not (I think we all agree that it is not) doesn't concern the ones who want to be re-elcted and who have to come up with some money for Greece without asking the German taxpayer.

Anonymous said...

Any use of structural funds is nothing short of CONTAGION and must be avoided at all costs. This is a Mananazone problem and nothing to do with the nations that are EU members but not part of the Mananazone.

It just highlights the fact that the whole EU/Eurozone set up is a busted flush that has financially broken large parts of Europe for decades, if not forever. It also shows that there is no long-term strategy for dealing with the problem properly, instead we have short-term solutions that are driven by self-interest and elections in various member states.

I, for one, refuse to pay for other countries profligacy and the incompetence of certain Eurozone nations in failing to deal with it properly. This is a game changer for me should the UK (and ate heavily indebted children) be forced to pay for it. Besides, the Greeks and other PIGS should grow some balls by defaulting and reverting back to their own pre-Euro currencies.

Welcome to the Mananazone where every day since 2008 is a Groundhog Day.

UK out.

SC

jon livesey said...

There is a pattern that repeats across both eurozone and private funding. If your economy is only semi-developed, then cheap capital will not create hi-tech companies or complex industries.

In countries like Spain and Portugal, people who had engineering, technical and management qualifications were already employed when the countries joined the euro, while unemployment was high among less skilled people.

The wave of cheap credit that swept in after 1999 thus had no opportunity to expand high-tech production and instead it went into low-tech activities like house, road and other infrastructure activities.

For a while that drove unemployment down, but when the construction boom ended, unemployment retraced to 1990's levels.

What's even worse, now that the empty houses and unused infrastructure have been built, they can't be built again. Even if Greater Germany decided to pour funds into the periphery, there is now no economic activity the periphery can begin that will usefully use that capital.

That implies that Spanish, etc., unemployment will remain at very elevated levels for a very long period of time.

Only if the peripheral countries actually left the euro and devalued could they begin to grow by increasing exports.

As it is, Spanish export volumes are only marginally above the levels of 2008, and show no signs of strong growth.

Rollo said...

Everywhere you go in the Med, there is the joke of EU roundabouts. Huge idiotic constructions, with huge propaganda boards praising the EU Cohesion Funds or similar; all joining dirt roads, all with traffic that surprises you when another car comes into view. And contractors who have made a bomb; and politicians sitting a little higher on their wallets; and government debt piling up. Nit just an absurdity but an obscenity

Average Englishman said...

Several years ago when air traffic was grounded in Europe because of volcanic dust in the atmosphere, I was obliged to drive from the UK to Latvia and it was striking how many new roads and infrastructure projects had signs on them claiming that the work was paid for by the EU. In particular a nice new motorway reaching across Poland as I recall. All paid for with massive amounts of UK taxpayers' money; my family's money.

Since that time several more people have died (mostly young people), on a mile long stretch of dangerous road near to my home that has badly needed upgrading to a dual carriageway for many years but whenever work was requested the cry came up from the authorities: 'we have no money!' Thankfully, the work will now soon be done but far, far too late and it will be of no consolation to the relatives of those who have died.

And the UK's political class mainly still can't understand why so many people want the UK to leave the EU, (now including me). I cannot express strongly enough my contempt for the vast majority of the bureaucrats in Brussels and our own UK politicians who pander to them. Shame, shame on the incompetent and self important lot of them.

No more UK money should be wasted on EU vanity road, etc., projects or to bail out the doomed Euro. It would be just yet more money down the drain and Cameron had really better start listening to his electorate and party more closely on this issue or he will have to get used to losing votes in both the Houses of Parliament (as per Syria), and National elections.

Anonymous said...

Sovereign nations are best placed to decide where scare resources are put to use and NOT unelected, bungling and unaccountable EU politicians.

19 years of unaudited accounts and still they are allowed to be in business. Show me another entity on this planet that can continue to trade with 1 or 2 years worth of unaudited accounts let alone 19. What a waste.

SC

Jesper said...

Redefinition of the word 'structural' to allow funds to be used where not currently allowed or reform of budget and budgetary procedures?
The resistance against reform is huge so...

IDRIS said...

Yet again the question must be asked, how much longer - and why - would anyone with half a brain want to be involved with the doomed, terminally incompetent, wasteful, fraudulent catastrophe that is the EU?

If the ship is sinking, take the advice of an Italian cruise liner captain - get off!

Or as the old American Indian saying supposedly goes "If you find you are riding a dead horse, it is a good idea to dismount"