Monday

10th Aug 2020

Opinion

As recession looms, Europe needs more spending

  • The 27 European Union countries have still not agreed on the multiannual financial framework for 2021-2027. Without a clear UK decision on Brexit, the construction of the next EU budget is impossible (Photo: Martin Vorel)

Brexit may have another victim and it is the EU budget for 2021-2027.

The uncertainty about the fate of Britain means that the budget is not going to be ready by the end of October and the negotiations are going to take more time.

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In the worst case, structural funds for the developing economies of the EU will be blocked in 2021 when the European economy will be in a downturn.

This means delays in high profile tenders and other projects which helped to prosper all EU countries.

With a slowing growth and a prospect of recession in some countries the EU is in need of a new Marshall Plan reigniting the growth engines in all EU member states.

Growth is sluggish

According to the summer forecasts by the European Commission the European economy continues to grow at a moderate pace, to say the least, and there is no acceleration any time soon.

The EU is expected to expand by 1.4 percent in 2019 and the euro area by 1.2 percent.

But Germany, the most important economy of the EU and eurozone, is expected to grow just by 0.5 percent in 2019.

At the same time countries, which are still catching-up as Czechia expect a growth of 2.6 percent this year and 2.5 percent next. Hungary 4.4 percent this year and 2.2 percent, Romania 4 percent in 2019 and 3.7 percent next year.

The EU is still on track to grow by 1.6 percent in 2020, but the eurozone's growth will slow down to 1.4 percent - most economists expected higher growth next year and the second quarter of 2019 is truly bad for Germany with a technical recession and Italy as well, which is expected to grow just by 0.1 percent in 2019 or even be in recession.

Next year's growth is expected to accelerate to 0.7 percent but that means still the slowest growth in the block.

The outlook for global growth outside the EU is unsatisfying to say the least.

The recently intensified trade tensions between the US and China as well as the broader political uncertainty globally fueled by the political chaos in Britain translate to a slowdown.

Global GDP growth (excluding the EU) is projected to slow from 3.8 percent in 2018 to 3.4 percent in 2019, before picking up moderately to 3.6 percent in 2020.

The only landscape looking somewhat good are the central and eastern countries that use EU cohesion policy as a growth stimuli.

In Poland fiscal expansion in 2018-2020 translated into growth numbers as high as 5.1 percent and projected 4.4 percent in 2019 and 3.7 percent in 2020.

Brits might kill all our plans

The 27 European Union countries have still not agreed on the multiannual financial framework for 2021-2027.

President of the European Council, Donald Tusk, just informed that he will delegate the task of adopting the new budget to his successor - Charles Michel.

The current Brexit date is October 31, but it is not yet decided whether the British will leave the community on that day. Meanwhile, without a clear UK declaration, the construction of the EU budget is impossible.

At this point, the Union budget for 2021-2027 is based on the assumption that there will be no UK in the community.

But if Brexit did not happen, the Union's financial plan will need to be completely reorganised. Brussels must know London's final plans at the latest in early 2020.

If the multiannual financial framework could not be agreed and translated into legal regulations in 2020, it may turn out that the payment of structural funds in the eve of the global slowdown may be halted.

We would expect an EU-wide depression of growth in 2021 or even a recession in both old and new member states.

Structural funds matter a lot. The new perspective is going to be focused on artificial intelligence, new technology, boosting innovation and modernisation of the energy potential of the EU and decreasing carbon dioxide emissions.

We know that the total budget is going to be lower than in previous years due to Britain's departure but we should treat it as fiscal stimulus for growth.

Germany and others need to spend more

The Financial Times editors, heads of German business and many economists argued that Germany should start spending which it does not intend to do.

In the absence of that cohesion policy must be treated as the stimulus the European economy desperately needs because every euro spent on cohesion policy generates almost three times as much GDP in some member states (according to a report by the Polish Economic Institute entitled "Cohesion policy, or solidarity in action").

Portugal, Greece and the CEE countries benefit the most from it in terms of per capita revenue.

The budget for cohesion policy amounted to €787.96bn in 1989-2013. Money spent in the framework from 2007-2013 will contribute €1bn to EU GDP by 2023.

Each euro spent has an catalyst effect in the economy creating additional public investments, trade and consumption and old EU countries benefit. Economic development in countries like Poland or Slovakia is one-twentieth higher due to the spending of EU funds.

Just with creation of additional trade 80 percent of those funds have returned to the countries that transferred them and in some countries the benefits were astonishingly high e.g. for Austria (331 percent), Germany (150 percent), the Netherlands (145 percent) or Belgium (114 percent).

Since 1958 when the European Social Fund and European Investment Bank were established we use these funds as an anti-cyclical tool that can better the lives of Europeans but also increase growth rates.

Europe needs more vigour and more targeted spending in the next framework. With or without the UK we must develop in order to keep up with China and the US.

Author bio

Piotr Arak is the head of the Polish Economic Institute, a public think tank in Warsaw.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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