From The Economist
IN GENERAL only eccentric millionaires, intent on disinheriting their children, subscribe to the idea that being given large wads of money is bad for you. Certainly, it is not a belief that has a wide following in the European Union. Its officials in Brussels are very proud of the Union’s programme of regional aid—the euro213 billion ($227 billion) in “structural” and “cohesion” funds being sent to poorer parts of the EU from 2000 to 2006. Regional funds are hailed as living proof of European “solidarity”: the richer parts of Europe reaching out to the poorer regions, prosperous countries aiding their less well-off brethren. The EU insists that the effectiveness of such regional aid has been shown by the economic growth it has spurred in Spain, Ireland, Portugal and Greece—the four countries that are the biggest recipients. This in turn has offered bigger markets to the rest of the EU, providing a “win-win situation”, as the jargon goes. The promise of gleaming new EU-financed motorways and fine civic buildings has been among the biggest inducements dangled before the ten countries due to join the club next year.
So virtuous is regional aid generally considered that it is regarded as almost treasonable in the main recipient countries to question it. But when Pedro Pita-Barros, an economist at Universidade Nova de Lisboa, tentatively raised the idea at a conference, he was surprised by the response. “Lots of people came up afterwards and said that they privately agreed with me,” he says.
The most obvious way that regional aid might be damaging is by distorting priorities. Businesses spring up to exploit the availability of subsidies, most obviously for construction and “training”, rather than responding to the real demands of the market. In order to qualify for it, recipient countries usually have to chip in around half of the cost of an EU-financed project. That tempts them to spend taxpayers’ money on schemes that they might otherwise not bother with. This is a potential headache in a country like Portugal, which is undergoing a ferocious budgetary squeeze to keep within the euro area’s fiscal rules but which is nonetheless tempted to press ahead with new infrastructure projects of marginal value—for fear of losing “European money”.
Mr Pita-Barros also worries that structural aid may have a corrupting effect. “It’s when you hear people seriously suggesting that Portugal should fiddle its official statistics, so that we are still rated poor enough to qualify for European subsidies, that you wonder if this has gone too far,” he muses. That concern is echoed much more forcefully by a senior Greek official in Brussels. “The best thing the EU could do for Greece is to cut off the structural funds immediately,” he says. “They’re turning Greece into Europe’s Mezzogiorno [the depressed southern part of Italy]. Anybody who works hard at a regular business is regarded as an idiot, since it’s much easier to set up a project to draw in European subsidies.”
Isolated complaints and anecdotes are one thing. But there is also more serious analytical work that is beginning to query the received wisdom that structural funds are an unalloyed good. A recent article* in Economic Policy, an academic journal, asks “Is structural spending justified?” and concludes that “certain EU interventions may be leaving countries worse off than they would have been if economic forces had been allowed to run their course.” The authors, Karen Midelfart-Knarvik of the Norwegian School of Economics and Henry Overman of the London School of Economics, suggest that “EU aid programmes attract R&D-intensive industries to regions receiving relatively high amounts of aid but which are not abundantly endowed with skilled labour.” The result is a distortion of economic development, as poor regions are encouraged to go high-tech, when they might be better off concentrating on more basic industries.
The EU defends its regional aid by pointing to the fact that Europe’s poorer regions and countries have been catching up with the EU average over the past generation. According to the European Commission, the average GDP per person of Europe’s poorest regions rose from 54.2% of the EU average in 1987 to 61.1% ten years later. The catch-up for poorer countries like Spain and Ireland was even faster; indeed, Irish income per head is now quite a lot higher than the EU average.
But the fact that poorer countries have been catching up faster than poorer regions gives the game away. Around 90% of EU aid goes to regions rather than countries. Poor European regions have been gaining on the EU average largely because most of them are in poor countries that have been growing faster than the European average. However, within the poorer EU countries, gaps in wealth between the regions are actually widening. In other words, those regions most heavily showered with EU money have done worse than the less favoured parts of the same country.
But politicians love to spend
Does that settle the argument? Not necessarily. Defenders of structural funds argue that poor regions would have been left even further behind, were it not for all that lovely Brussels loot. But that is where the doubts of officials and academics who have studied EU policies in action come into play. Look beyond the ubiquitous signs advertising EU largesse in southern Spain and rural Greece, and you get a less glowing picture.
No academic study, though, is likely to have much impact on the structural-funds industry. Those in Brussels who strive to promote the Union know that EU-financed programmes are among their most effective propaganda instruments. And what national politician can resist the temptation to trumpet a big new spending programme, particularly if it is other countries’ taxpayers who are footing the bill?
*“Delocation and European Integration—is structural spending justified?” by Karen Midelfart-Knarvik and Henry Overman, in Economic Policy, October 2002.