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? 

• It’s a bureaucratic nightmare to get to the actual cash – exactly what Greece doesn't need. 

This also illustrates why (almost) the entire EU budget is pretty much a running disaster, in desperate need of root-and-branch reform.

See you in Court? UK-Spanish dispute over Gibraltar rumbles on

The HMS Westminster leaving Portsmouth for Gibraltar

A week on there appears to have been no progress on the Gibraltar front - the Gibraltarian authorities are still not budging over the artificial reef, the Spanish are maintaining their additional burdensome controls and the UK is still "considering" a legal challenge under EU law.

As we have argued, neither a challenge on free movement rules nor one on "proportional" border checks carries a guarantee of success due to the ambiguity of EU law. Equally, the Spanish feel they have a strong legal case against the artificial reef based on the very specific wording of the 1713 Treaty of Utrecht - meaning a retaliatory case is not out of the question.

An alternative could be an individual or collective challenge by Gibraltarians (or even Spaniards working in Gibraltar) to the Strasbourg-based European Court of Human Rights, but that could take a long time.

Since then, tensions have escalated with the dispatching of several Royal Navy vessels to Gibraltar (reportedly as part of a long planned manoeuvre) and claims in the Spanish media that the country could from a united diplomatic front with Argentina, which of course has its own axe to grind with the UK. Although we think a diplomatic solution is still the most likely outcome, if none of the sides are willing to back down the UK may be forced to actually initiate legal proceedings, most likely under a 'fast-track' arrangement, as it will by then not have many other practical options.

While initiating a legal challenge may itself force all the sides to resume negotiations, should Madrid still not back down and should the ECJ rule in its favour, this dispute may have more fundamental repercussions on the UK's future in the EU.

Between a rock and a hard place: Is Spain breaching EU law by making life difficult for Gibraltarians?

The 'Gibraltar question' has consistently been the biggest bone of contention in UK-Spanish relations ever since the 1713 Treaty of Utrecht which saw the territory permanently ceded to Britain. Although the issue never goes away, every now and then it flares up, and the decision by the Gibraltar authorities to construct an artificial reef - to prevent alleged incursions from Spanish fishing vessels - has been the latest trigger.

The Spanish authorities do have the scope to make life difficult for the Rock's inhabitants, and Spanish Foreign Minister García-Margallo has commented that this time, "the party is over". Madrid has already introduced stringent border checks on people travelling in and out of the territory - resulting in up to seven hour queues on the border (in stifling heat) - and further actions have been threatened, including €50 levy on cars entering and leaving the territory, as well as a tax crackdown on Gibraltarians who live on the Spanish side of the border.

Leaving aside the question of whether this is even in Spain's own interest given its own economic problems (thousands of Spanish citizens work in Gibraltar), are these types of measures - particularly the levy - even permitted under EU free movement rules? EU law prohibits discrimination against citizens of other member states when it comes to free movement, and the UK has indicated it could issue a legal challenge.

So does the UK have a good case? Article 45 of the EU Treaties which establish the principle of free movement states that:

2. Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment. 

3. It shall entail the right, subject to limitations justified on grounds of public policy, public security or public health: 
(a) to accept offers of employment actually made; 
(b) to move freely within the territory of Member States for this purpose; 

Discrimination is clearly prohibited for the purposes of employment, as is the ability to "move freely" within member states for this purpose, although exemptions for "public policy" and "public security" are quite vague. However, the right to free movement covers the right to live and work in another member state, it does not address the more specific issue of travelling between two member states for this purpose.

The UK and/or the Gibralterian authorities could however argue that the burdensome checks are a de facto impediment to the ability of British and Spanish citizens to exercise their right to work in another member state (i.e. on the other side of the border) and are therefore illegal under EU law. This is particularly true as the restrictions would not apply to the other border crossings, such as the Portuguese or French ones, although the Spanish could counter that the levy would be no different to localised toll roads or charges.

On the border crossing issue, EU member states are still allowed to police their own external borders, but internal border controls have been abolished in the Schengen area of which the UK is not a part. Therefore, Spanish authorities have the right to impose border controls, but according to a Commission source they have to be "proportional".

In other words, we have absolutely no idea whether the UK would be successful should it take Spain to the ECJ. The wonders of EU law...