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Tuesday, January 24, 2012

Off target: The case for bringing regional policy back home

In a weighty new report published today we take a critical look at the EU’s structural funds which are the means through which the EU implements its regional policy. We estimate that over the course of the current 7 year EU budget, the UK will pay in around £30bn to the EU’s so-called structural and cohesion funds, but will get back just under £9bn.

In our press release, we argue that:
“Limiting EU regional spending to poorer countries would be a win-win situation for both Britain and Europe. It would channel more cash to the newest member states and allow the UK to spend exactly the same amount on its regions as it does now, with the option of adding the several billion that it would save from streamlining the structural funds. It would also eliminate a range of additional costs and allow the Government to radically improve the targeting of funds towards poorer areas and to viable projects.”
What exactly is the problem?

The EU aims to reduce regional disparities but under the current system, every region in every member state receives at least some financial support, regardless of how wealthy it is. This means a significant part of the UK’s contribution goes to member states with a comparable level of income. According to our calculations, of the UK’s overall contribution, 70% goes to other member states, 25% is redistributed within the same UK region in which the funds were raised, and only 5% is redistributed between richer and poorer regions within the UK.

This recycling exercise is fundamentally economically irrational, and even the Commission has recognised that it creates “considerable administrative and opportunity costs.”

It also means that most UK regions, even the most disadvantaged, are short-changed because they pay in more than they get out. For example, the West Midlands, which has the lowest disposable income per capita in the UK, pays £3.55 into the structural funds for every £1 it gets back. Other regions that do badly from the current set-up include the North-East, Merseyside, Lincolnshire, Northern Ireland and parts of inner London.

While there is a strong case for having an EU regional policy to assist the poorer member states that have joined the EU since 2004, there is literally no “added European value” – the criteria for justifying EU-level as opposed to national-level decision making – to keeping all member states locked in.

So what can be done?

Our proposal would see the implementation of an eligibility threshold of 90% of EU average income, above which member states would no longer receive any support. This would on one hand enable the remaining funds to be focussed exclusively on the poorer member states, while allowing richer member states to still make significant savings and regaining control over their regional policies and spending. This is broadly in keeping with the position adopted by the previous Labour Government.

What impact would this have?

Such a measure would create a whole range of winners, and a handful of ‘losers’. To illustrate, if this policy had been adopted for this EU budget period (2007-2013):
  • France would have emerged as the biggest winner from focussing the funds on the poorer states, cutting up to €12.8bn from its net contribution to the EU budget over seven years.
  • The UK comes second, with a net saving up to €5.1bn (£4.2bn) over seven years.
  • Importantly, all new Central and Eastern European member states would see a rise in the amount of subsidies they receive (except for Slovenia under one possible scenario), with Poland gaining the most.
  • Italy, Spain and Greece would all lose out substantially, but they are already set to get a smaller share of EU subsidies as recent enlargements continue to erode their net receipts. More importantly, to cope with the eurozone crisis, these countries need far more responsive and targeted support than is currently being offered by the structural funds.
The way ahead for the Coalition

It appears the Coalition has opted for a ‘safety first’ approach with regards to negotiations over the EU’s next long-term budget (focussing on keeping the overall amount down and protecting the UK rebate). However, pushing for a more ambitious reform along the lines of our proposal would see a significant reduction in the size of the budget and would be better suited to building alliances with like minded member states.

Devolving regional policy from the EU would be a good move for the Coalition if it is to come good on its commitment of ‘rebalancing’ the UK economy away form its reliance on the South-East and financial services, and place to start. The UK could then launch a revamped regional and re-generation policy which would start with the £8.7bn that the UK currently spends via the structural funds, and then re-invests the additional £4.2bn saving from the reform. This would mean virtually all UK regions would experience a rise in the amount of subsidies they receive by around 45%.

In 2003, then Chancellor Gordon Brown argued that:
“the economic and social, as well as democratic, arguments on structural funds now and for the future so clearly favour subsidiarity in action, there is no better place to start than by bringing regional policy back to Britain”
Almost a decade later, this statement still points out the path ahead for the UK.


Rik said...

And while we at it:
-proper evaluation if programms work and offer value for money.
-same could be done with business-sectors, agriculture comes to mind. If France wants to subsidise basically uncompetitive farmers let them do it from their own budget.

JL said...

This approach has been attempted several times but has never come to pass for two main reasons (i) irrational as it may seem, popular acceptance of a regional policy at the EU level requires that all countries have some involvement (ii) local authorities and regions often prefer the "dead hand" of "Brussels" to that of their own central central governments.

There is also the small matter of the UK rebate. As matters stand, France, Italy and Spain fund must of it as Germany negotiated a 75% reduction in its assessed share of the cost (with the Netherlands, Sweden and Austria). The idea of this situation being allowed to continue while depriving Italy and Spain of structural spending is politically unrealistic.

The UK rebate mechanism institutionalises to a certain extent the principle of juste retour, an idea that is fatal to the entire concept of EU solidarity.

The negotiations on the next financial framework will almost certainly show that it is no longer tenable from a purely "mechanistic" point of view and this risks causing a permanent rupture rather than just a temporary schism in the UK's relationship with the EU.

Lancaster said...

Re-negotiate. We are not a charity for the EU hardups.

JL said...

For a broader and more balanced view of the situation, this graphic just published by the Guardian is really excellent.


It has a few lacunae, notably the fact that one cannot pick any one year of the budget to assess the amount of the UK rebate as it is booked over a period of years and varies according to the pattern of expenditure (as noted in the actual Open Europe report).

The proposal on repatriating regional policy may find some initial support from the larger net contributors until, that is, they have to explain to thier regional beneficiaries why aid from Europe is being brought to a halt.