WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

By Sandor Richter.

• Brexit, a desire to put more resources into EU-wide projects, a lack of solidarity over refugees in some parts of EU-CEE, and reports of corruption in the use of EU funds in newer member states, could contribute to a smaller EU budget after 2020.
• This will have important implications for EU-CEE, given the large contribution to aggregate demand provided by EU transfers.
• However, while a reduction in EU funds to EU-CEE will be painful in the short run, eventually it should help to improve competitiveness and may help to tame corruption in the region.

The future of cohesion policy is of huge importance for EU-CEE. Cohesion policy is the part of the EU budget where the most significant cross-member state redistribution of wealth takes place. Economic growth in EU-CEE has become highly dependent on transfers from the EU budget, which have contributed 1-4% of aggregate demand annually in the region since 2006.

However, things look set to change. Brexit is likely to shrink the EU budget by at least 12-14%. Meanwhile, the attitude in wealthier member states could be less generous than in the past. The future of cohesion policy could therefore set to be the most difficult area to find a compromise when designing the EU’s new post-2020 multiannual financial framework.

Five issues will determine the future of this important pillar of EU-CEE economic growth:

1. Net contributors to the budget no longer make their money back on trade

Net contributor member states tend to see their negative net financial position vis-à-vis the EU budget as a burden, while net beneficiary member states often refer to the positive externalities net contributors enjoy from the existence of these transfers. A wiiw study compared the balances in trade between net contributor and net beneficiary member states with the net financial positions of both groups vis-à-vis the EU budget for the year 2006. In that year, all but one of the then net contributor member states registered a trade surplus with the group of net beneficiary member states. Altogether, the group of net contributors achieved a combined surplus in their trade with the group of net beneficiary countries of close to six times as high as the sum of their ‘losses’ due to their combined net contributions to the EU budget.

However, this situation, which characterised the early years of the EU’s eastward enlargement after 2004, has since significantly changed. The net financial position of the net contributor member states has deteriorated relative to 2006. In part, this reflects further enlargement, which has added a further three net beneficiary members (Bulgaria, Romania and Croatia). More importantly, the net beneficiary EU-CEE countries have since turned the trade balance to their advantage, many of them reaching substantial surpluses in trade with the group of net contributor member states in the last decade.

2. Finding a balance between supporting poorer regions and funding EU-wide projects is difficult

The primary purpose of the EU’s cohesion policy is to accelerate economic and social change in less developed EU member states and regions. However, these goals compete with others that are also seen as important in much of the EU, such as the attainment of EU-wide objectives in research and innovation, continent-wide infrastructure and telecommunication networks, entrepreneurship, social inclusion, and environmental protection. The range of these EU-wide objectives depends critically on the amount of available funds. Many net creditor member states are keen to ensure that sufficient money is allocated to EU-wide projects, which has implications for the amount that will be targeted towards cohesion policy.

3. West-East “solidarity” has sounded hollow since the 2015 migration crisis

Most EU-CEE countries showed limited or non-existent willingness to share the burden of managing the fallout from the 2015 migration crisis. This has been interpreted by politicians in several major net contributor member states (which were often those facing the biggest inflows of migrants and refugees) as a lack of solidarity. With cohesion policy also resting largely on the basis of solidarity, it is easy to see how the countries which have borne the brunt of the migration crisis may be less willing to send money East in the future.

4. Murmurs about corruption of funds in EU-CEE are growing louder

There have been an increasing number of reports alleging corruption in the utilisation of EU funds in parts of EU-CEE. This could support the arguments of those in net contributor countries who have been urging a better utilisation of these funds, and could mean either stricter conditionality or cuts in the overall level of transfers in the future.

5. Despite some initial scepticism, the Juncker plan is having a positive impact

The European Fund for Strategic Investments (EFSI), also known as the ‘Juncker plan’, has started to produce positive results. Jointly launched by the EIB Group and the European Commission, it aims to mobilise private investment in projects which are strategically important for the EU. Unlike cohesion policy, it does not rely typically on grants, but rather on credits disbursed under preferential conditions. As a model it provides an increasingly attractive alternative to the current grant-based modalities of cohesion policy, and may well help to cushion the blow of any reduction in transfers to poorer member states post-2020.

Outlook: A leaner, better cohesion policy?

A much leaner cohesion policy from 2021 onwards looks likely. Not only could the funds allocated be much smaller, but the grant-like forms of support may shrink to a minimum. That would be painful for the main beneficiary countries in the short run. However, over a longer time horizon it could benefit them, by reducing their dependence on artificially ‘cheap’ and ‘market-unfriendly’ external resources. This could in turn foster an improvement in their competitiveness and would probably also help to reduce corruption in EU-CEE.

This is a shortened summary of an article that first appeared in our November Monthly Report. For six months after publication, wiiw Monthly Reports are only available to members. To learn more about wiiw membership, click here.