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18th Aug 2019

Analysis

Differing opinions on how to measure economic results of 'cohesion'

  • Cohesion policy projects in Romania (Photo: European Parliament)

Cohesion policy is one of the biggest chunks of the EU budget – and the subject of the fiercest haggling every seven years among EU leaders when they meet to agree on the numbers of the next budget.

Funding between 2014-20 amounted to €351.8bn (almost a third of the entire EU budget), and a budget of €373bn is planned for 2021-2027, according to the EU commission's proposed new long-term budget.

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  • Former commissioner Laszlo Andor said that Poland and Hungary would have been much less prosperous over the last 15 years without EU funds (Photo: European Commission)

One reason it is one of the most contested EU policies is that net payers can see it as a burdensome tradition, rather than an investment in the future - while recipients argue it is a due compensation for opening their markets.

The policy is laid out in the treaty, in which member states pledge to work on "reducing disparities between the levels of development of the various regions and the backwardness of the least-favoured regions or islands, including rural areas."

"A heterogeneous, but integrated, market system requires tools to contain imbalances and prevent divergence," Laszlo Andor, a former EU commissioner for social affairs, told EUobserver.

"Through cohesion policy, the community contributes to investment everywhere - but especially in countries and regions where incomes are lower and resources are thinner, and the vicious circle of underdevelopment is a real risk. Needless to say, to tackle such risks is in the interest of the whole EU," Andor argued.

Andor said cohesion policy is working – but admitted it could function better.

The ex-commissioner said lower-income EU countries have very little public investment in which EU funds don't play a part, and that it is also "crucial" in some regions of higher-income countries.

However, the cohesion policy's effectiveness is regularly called into question, and net contributors often point to mismanagement or even corruption. One of the problems is that measuring cohesion policy only through economic growth can be very narrow.

Nevertheless, some of the central and eastern European countries which have received billions of euros in the past 14 years have seen hefty economic growth.

The commission said in its forecast last spring that Poland's economy is expected to grow by 4.3 percent this year and 3.7 percent next year. Hungary's economy is set to grow by 4 percent and 3.2 percent next year.

Andor said Poland and Hungary would have been much less prosperous over the past 15 years without EU funds, even though some development would have taken place by receiving foreign direct investment.

What is the effect?

The effectiveness is difficult to measure even according to the EU commission, which steers the program, as there are 270 regions with different needs and objectives.

According to the EU executive, under the regional and cohesion funds (two of the biggest amounts of money under the policy), 1.3 million jobs were created in the EU during 2007-2013, and over 356,000 small-and-medium enterprises (SMEs) and 141,000 start-ups were supported.

During this financing period, some 7,541km of railway was renovated, 475km was newly-built, while 41,189km of road was repaired and 6,667km of new roads built.

Some experts, however, argue that while the cohesion funds create a short-term capital infusion, they have no long-term effect on economic growth.

A Budapest-based research institute, Hetfa, said in a report that, due to EU funds, in Hungary GDP was higher by 4.9 percent in 2015 than it would have been without the subsidies. Employment increased by 2.8 percent.

Subtracting the short stimulus rush on demand caused by the EU funds still leaves Hungary with a 2.1 percent higher GDP than without the EU funds, and employment increased by 0.8 percent compared without subsidies.

Zsolt Darvas, an analyst with the Brussels-based Bruegel think tank, agreed that the policy's effectiveness raises questions.

Money dispersed by three different funds under 'cohesion' has a short-term effect that has contributed to Hungary's GDP growth. But this is generally used for imports and boosting demand.

"The long-term effect remains moderate as the short-term effect of spending money wanes," Darvas told EUobserver.

One of the aims of cohesion was to inject capital into post-communist countries. But the funds have - to some extent - been taken advantage of by companies that use the additional financing for investments they would have made anyway.

Some experts are also concerned that the funds were used for the daily operation of existing institutions, like university departments, via projects intended for deeper academic research.

"The cohesion policy effectively has not contributed to growth," said Balazs Szepesi, an analyst with the Budapest-based Hetfa Research Institute, who has been following the issue closely for decades.

According to an analysis by Hetfa, Hungary's annual GDP growth was only 0.1-2.0 percent higher because of EU funds in the 2007-13 financing period. Sustainable growth they found was 1.0 percent in the period 2007-13.

Hetfa's report also concluded that only 81,000 jobs (in a labour market of 4.2 million) were created, most of them for the duration of the projects. Over the long-term, approximately 20,000 people found jobs thanks to the cohesion programs.

Too tight, too loose?

Szepesi said the key reason for this is that cohesion policy – in the past 14 years since central European member states joined the bloc in 2004 – has become more bureaucratic and rigid.

The EU sets goals and member states and regions can choose from those.

"The countries' and regions' hands are tied. They spend the money on what they can, not on what they need to," Szepesi told EUobserver.

Szepesi argued that the EU has sacrificed some of the effectiveness, for the sake of being able to measure the impact of cohesion policy.

He added that the pressure to fulfil indicators to prove that a fund has been used dissuades stakeholders from taking risks – and that hinders more tangible results.

The success of an education project, for instance, might score higher if funds are made available for already relatively well-functioning schools: thus money is channeled to them, rather than schools in more difficult situations where progress is more difficult to achieve.

Szepesi added that cohesion funds contributed to the 'economic miracle' seen in previous decades in Spain and Ireland – but that the rules of the programs became stricter once Europe's eastern flank joined.

The commission-led administration, Szepesi argued, wants to limit how much of a say politics has in the distribution of the funds, which leads to avoiding setting clear targets and negates taking responsibility for the spending of the funds, and blaming "Brussels".

This also makes political accountability more difficult, Szepesi pointed out. He argued that, instead, politics should have a wide room for manoeuvre when designing programs and deciding on funds.

Darvas argued the opposite – that efficiency could be improved if, instead of member states, it was the commission directly in charge of managing cohesion money.

Darvas said there is a need for increasing the amount of aid that needs to be refunded, thus making stakeholders more interested in what they invest in, if the money needs to be paid back.

Darvas added that some of the proposals in the new long-term EU budget plan put forward by the commission in May might help efficiency: such as the rule of law mechanism, or channeling more money through the cohesion policy's regional fund, thus targeting regions directly.

Political deal

Perhaps the cohesion policy's effectiveness cannot always be expressed in mere numbers.

"Another reason [behind cohesion] was compensation for economic integration to the EU," Szepesi added, highlighting the political deal underpinning the policy - which makes it again more difficult to measure its effectiveness.

As 'core Europe', western member states accumulate capital and a labour force, the economic difference with the periphery is bound to grow, hence the need to rebalance that.

Central and eastern member states opened their markets, and shut down industries, because of EU integration, resulting in job losses, while the growing imports stimulated the economies of the West.

Darvas of the Bruegel think-tank describes this as a comprehensive political bargain, made at the time most central and eastern European joined the EU in 2004: open markets in return for compensation.

Recipient countries use the argument in budget talks today to argue that net payers benefit hugely from cohesion funds through procurement contracts and the opening of new markets. Cohesion euros trickle back to where they came from.

The complex system of cohesion of funding, and its political image as an EU "sacred cow" might make it unpopular among policy-makers, but it is a symbol of the EU solidarity that is in scarce supply on the political market of today's Europe.

This story was originally published in EUobserver's 2018 Regions & Cities Magazine.

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