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.

The EU's structural funds - still heading in the wrong direction?

A new report published by the EU’s Court of Auditors yesterday provides an interesting reminder of the failings inherent in the current EU regional policy, whereby the cash is recycled between every region in every member state – irrespective how wealthy – via the EU's structural funds.

The EU has allocated around €65bn towards co-financing the construction and renovation of roads between 2000 and 2013, and the ECA report focuses on 24 projects in Germany, Greece, Poland and Spain, coming in at a total cost of around €3bn. The good news is that, unlike in one particularly notorious case in Southern Italy, the money was actually used to build or upgrade roads which “delivered savings in travel-time and improved road safety”.

However, the report then goes on to state that:

“insufficient attention was paid to ensuring cost-effectiveness. Most of the audited projects were affected by inaccurate traffic forecasts. The result was that the type of road chosen was often not best suited to the traffic it carried. Motorways were preferred where express roads could have solved the traffic problems. 14 out of 19 projects recorded less traffic-use than expected.” 

“due to the lack of appropriate indicators (such as actual employment created, share of new transit traffic, number of new enterprises in the region)… it is not possible to assess whether the funded projects actually generated the expected economic impact.” 

This is a microcosm of the wider problems with EU regional policy. As we argued in our 2012 report on this topic: “There are still a number of problems with the funds, including an unsatisfactory correlation between funding and results.” We also flagged up that, contrary to some of the Commission’s more boastful claims, due to the inability to consider individual indicators in isolation, it was virtually impossible to objectively assess the economic impact of the structural funds.

Essentially, project selection across the EU is driven more by the fact that there is a pot of money that has to be spent, and less by the existence of a genuine economic case or by seeking to maximise added value. The report also found that the cost of constructing roads varied hugely both between and within countries. Interestingly, the German projects were the cheapest, followed by Greece and Poland, with Spain being the most expensive.

Fundamentally, this also illustrates another point we raised in the report – namely that the structural funds come with significant opportunity costs – i.e. where spending leads directly to other, more productive economic opportunities being wasted. For example, the money spent on the La Herradura project in Spain – where actual traffic was 50% lower than planned - could have been spent on a different project with higher economic returns or not raised via tax and sent to Brussels via national governments in the first place.

This also underlines another critique set out in the report – that far too much cash from the structural funds has been funnelled into infrastructure construction (some of it clearly not corresponding to a genuine economic need) in the countries most affected by the eurozone crisis – Spain, Portugal, Greece etc. resulting in a number of ‘white elephant’ projects.

In wealthier EU countries – and also those most affected by the eurozone crisis – EU structural funds are simply the wrong tool for boosting regional development. While there is a case to be made for continued support to less wealthy member states via the EU budget, wealthier member states could both achieve a much needed financial saving but also regain the ability to tailor the rules to better suit their own circumstances rather than being constrained by Brussels’ one-size-fits-all framework.

In the UK, such a move would broadly enjoy cross party support and could save the government around £4bn net over seven years – something for Mr. Cameron (or indeed Mr Miliband) to target during the 2016 mid-term review into the long-term EU budget?