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Allegations of misuse underline need for better targeting and oversight
The irony was palpable when posters saying “Stop Brussels” appeared on line 4 of the Budapest metro during a “national consultation” organised by the Hungarian government in April this year.
Line 4 was completed in 2014, of course, thanks to funding from the EU. But an investigation by the EU’s anti-fraud office, OLAF, alleged “serious irregularities — fraud and possible corruption” in relation to the line, and recommended that the European Commission should recover €228m of funds that were allegedly misused.
Many have since called into question whether European taxpayers should continue to subsidise governments, such as those in Hungary and Poland, which refuse to comply with the bloc’s common decisions — regarding the refugee relocation scheme, for example — and which also seem to be backsliding from fundamental principles of the rule of law.
It is conceivable that a freeze of EU funds would make Viktor Orban and Jarosław Kaczynski double down on their anti-Brussels mobilisation, rather than bring them closer to the mainstream of European politics. However, that does not mean that business should continue as usual.
The EU structural funds have a number of overlapping and sometimes conflicting goals: enhancing the competitiveness of small and medium enterprises, supporting the transition towards a low-carbon economy, investing in research and development, training and transport networks, improving the efficiency of government administration, and others.
Jointly, these objectives ought to reduce regional disparities and make the EU a more competitive economic space.
In practice, national governments are responsible for disbursing funds subject to the EU’s monitoring. The combination of a lack of clear priorities and significant discretion for member states has consequences.
In a number of countries, most notably in central and eastern Europe, a system of clientelistic exchange has entrenched itself, with politicians directing funds at businesses that can later prove useful in mobilising electoral support.
That is not to say that the funds have been all bad. In fact, the money targeted at regions with a GDP per capita of less than 75 per cent of the EU average (formerly known as “Objective 1” spending) have been effective in increasing growth — although that is sometimes hard to prove.
One reason for lacklustre performance is clientelism. Take the most recent scandal reverberating at Slovakia’s education ministry. There, it appears, universities and other recognised research institutions, public or private, have seen very little of the €300m allocated by the EU to invest in R&D over 2014-20. Instead, an MP has alleged that much of the money has flowed to companies with no record of doing research, no laboratories, no equipment and no actual scientists on the payroll.
To be sure, the EU funds did not “bring corruption to Slovakia” as the country’s opposition leader, Richard Sulik, once claimed. Corruption and clientelism existed long before the accession of “New Europe” to the EU.
However, the inflow of substantial amounts of outside funds (the equivalent of 6 per cent of gross domestic product last year in Hungary’s case) has increased the return of such practices relative to a counterfactual in which politicians could only redistribute resources raised through taxation or public debt. Unsurprisingly, indicators of corruption, such as the World Bank’s Control of Corruption measure, have worsened in recent years across the region, too.
Development economists have long recognised that a combination of weak, corruption-prone institutions and “free money” — regardless of whether it comes from foreign aid or from natural resource revenue — seldom leads to good outcomes. Sub-Saharan Africa, Russia and, yes, much of New Europe are all cases in point.
Short of scrapping the funds, what can be done? First, the EU’s structural funds and the European Fund for Strategic Investments (EFSI), also known as the Juncker Plan, need a much greater clarity of purpose.
Instead of 11 vague priorities that cover most conceivable areas of public spending, the money needs to be targeted at genuine European public goods, with clear and demonstrable spillovers across national borders. R&D fits into that category, as well as programmes improving the mobility of labour across the EU, or transport, communications and energy infrastructure that spans national borders and that national governments would be unable to fund on their own.
Second, the EU must adopt a much more hands-on approach in disbursing its funds, instead of relying on national governments that are subject only to weak, ex-post monitoring.
The EFSI shows how it can be done. The Juncker Plan funds are administered directly by the European Investment Bank, which engages with applicants on the ground, private and public. Recipients are subject to the EIB’s standard due diligence process, verifying that the projects are economically sound, mature enough to be bankable and adequately priced.
Neither of these two prescriptions are fail-proof. There will always be some degree of waste, failure and corruption in all government programmes, national and European. But simply handing free money to aspiring local autocrats, as the European institutions do today, represents the worst of all possible worlds.
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Towards an Imperfect Union: A Conservative Case for the EU
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