EU structural budget should aim to make a bigger impact

Final agreement between the Council (ie member state governments) and  the European Parliament, for the Multiannual Financial Framework (MFF) for the years 2014-20, is close. The budget ceiling in relation to GDP has been gradually reduced from 1.18% in 1993-99 to less that 1% in the coming seven years[1]. Parliament has accepted with reluctance a reduction in real terms compared with 2007-13 but has won some concessions on flexibility to increase the scope for sums not used in one year to be spend in subsequent years, and, more importantly, to allow some switching of spending from one area where demand may turn out less to another which becomes a high priority.

 

EU budget is small but still important

When the single currency was being discussed as a theoretical project, an independent report, the McDougall Report of 1977, recommended that the budget for a more integrated EU, but still without full monetary union, should be 2-2.5% of GDP and that monetary union itself should involve a federation with expenditure of 5-7% of GDP, so as to manage the imbalances between participating states that could occur. In contrast, although the budget increased in the early 1990s, it has actually fallen following the introduction of full monetary union.

Nevertheless, the budget is significant both in terms of contributions and expenditure. Net payments to the budget are close to 0.5% of GDP for major countries like Germany, France, the UK, the Netherlands, Sweden and even Italy. This is not much less than the 0.7% OECD target for total foreign aid to less developed countries and as much as most are actually giving in such aid.

In terms of expenditure to poorer countries such as Greece and Portugal it is 3-4% of GDP and about 1% in Spain. Although Italy is actually a net contributor, expenditure in southern Italy, as well as in poorer regions of Spain, could make a contribution to boosting economic activity.

With all these southern countries in great economic difficulty, the question of whether EU spending is being used to best effect is an important one. There are two aspects to this question. One is a negative one: to impose sufficiently rigorous financial controls to ensure the money is spent as intended and not diverted into the hands of individuals or businesses for whom it is not intended. In reducing fraud the Commission claims to have been successful despite the fact that control of the funds still lies to a great extent at national and local levels, although sometimes the result is that not all allocated funds are used.

With regard to positive impact, the Commission claims that research shows that regional funding has had a positive impact on growth[2] in the regions concerned but whether right or wrong such studies are only of interest to experts. EU spending, especially structural spending in disadvantaged regions, should make a noticeable contribution to the inhabitants of those regions. At present and almost certainly over the next few years the most immediate need for these regions is to improve the prospects for young people after leaving formal education.

 

Youth guarantee is in danger of failure

The EU Commission won agreement by all EU member states at the beginning of 2013 that they would commit to a guarantee of training or paid work for all under-25s within four months of leaving education or losing a job. But the resources to put this into practice even with the political will is not available to the many countries struggling to meet fiscal commitments agreed with the Troika (IMF, ECB and Commission) for those under rescue programmes, or for others like Italy which are also being monitored by the Commission with a view to avoiding the need for rescue programmes. EU funding should therefore be made available with urgency for the purpose. Such funding should be possible under the remit of structural spending on economically-disadvantaged regions, which is provided with a third of the total EU budget.

 The reality does not show this urgency or commitment. So far only €6bn over the period 2014-20 is to be made available for helping young people find employment, which is less than 1% of the total EU budget. And it is not starting until January 1st, 2014.  A degree of caution is understandable on new forms of spending given the need to prevent fraud but there should be room for much more ambition than to spend only 1% of a modest budget on this challenge.

More broadly, the structural funds should be redirected from infrastructure to promoting vocational education and the creation and expansion of the small and medium enterprises which are the dominant providers of jobs, especially new jobs, in the better performing countries and regions. This switch should be particularly emphasized in southern Europe where infrastructure is now good.

Help to SMEs can be largely through help in providing affordable credit in association with the European Investment Bank (EIB) and the European Investment Fund (EIF). The latter’s JEREMIE programme, which leverages the structural funds, is a good example which could be built on. The aim should be to promote networks of business activity.

 

 



[1] The measure now used for the budget is the marginally different Gross National Income (GNI).

[2] This is, with qualifications, supported by EU Structural Funds: Do they lead to more growth? CAGE-Chatham House Series of Policy Briefing Papers, December 2012.