Cohesion policy promotes upward social convergence among EU countries. It is well-managed, well monitored and supports quality projects. Unlike tax avoidance and evasion, cohesion funding is a cash flow that works and delivers results.

According to a widely discussed piece in Politico by Clotilde Armand, there is a major fallacy at the heart of the EU’s budget debate, because we do not take into account the cash flow from the East to the West.

Profits of multinational corporations are being shifted, tax bases are eroded and the governments in Central European countries are left with less money to address their societies’ needs.

Clotilde Armand

I will not argue that more money is being shifted than new member states get from cohesion policy as Mrs Armand and Thomas Piketty before her.

It is true that CEE countries benefited from their membership in the EU, for example through an abundant stream of European funds – on average, over the past decade, countries in the region have received almost 2.5 per cent of GDP annually.

But there is a mutual benefit in the way the cohesion funds are being spent. Austrian, Italian or Swedish companies take part in public tenders and build roads, bridges or underground stations.

This, however, means that investment returns in the CEE region were largely transferred to the countries of the old Union. From the East to the West there has been a transfer of 420 billion euros over the last decade, according to Eurostat data.

At the same time, EU core countries such as Germany and the Netherlands have achieved enormous economic benefits related to the enlargement of the Community themselves: the current account surplus of only these two countries for the last 10 years is just over 2.8 trillion euros, of which the lion’s share falls on the new members of the EU.

This the same phenomenon that made Donald Trump so mad about China and started the US-Chinese trade war.

The dark side of a single market

The trade balance is one issue but the other one is taxation. If the profits are shifted, Western companies do not pay the taxes they are due. One might ask: if the cohesion policy budget is to be smaller maybe the effective tax rates paid by multinationals in CE should be higher?

European Union member states lose 170 billion euros a year due to tax avoidance and evasion – a figure we presented during the World Economic Forum in Davos this year.

Out of 170 billion euros, the EU loses every year 60 billion euros because of artificial profit-shifting by multinational companies – moving earnings from a higher tax jurisdiction to a country with a lower tax rate – 46 billion euros due to rich individuals moving wealth and 64 billion euros because of cross-border VAT fraud.

From 2007 to 2018 approximately 300 billion euros of taxes in eleven CEE countries were lost due to VAT, CIT and PIT aggressive optimization and fraud.

This would not be possible without a single market. Each great invention has its dark side and we should also talk about the missing profitsthat are taken away by mafia-like organisations.

The European Parliament said that six countries (Ireland, Belgium, Netherlands, Luxembourg, Malta and Cyprus) could be treated as tax havens because of the policies that they pursue.

During negotiations of the MMF let’s not forget about the elephant in the room – tax havens and profit shifting is the way in which money is transferred from the East to the West.

One could cite the great contemporary American poet Jay-Z and say that “we’ve got 170 billion problems, but cohesion policy ain’t one”. The next Multiannual Financial Framework needs to be bold as the Commission’s plans are.

An EU trademark

Cohesion policy is the EU’s largest investment instrument. Thanks to shared management, it drives European, national and local levels toward common objectives.

Only during the period 2007-2013 EU Cohesion Policy (i.e. the European Regional Development Fund, the European Social Fund, the Cohesion Fund) has created one million jobs, corresponding to one-third of all new jobs in the EU in that period of time.

Cohesion policy created a strong economic multiplier effect, it generated almost 3 euros of additional GDP for every euro invested, which will give an estimated return of 1 trillion euros of additional wealth by 2023.

Cohesion policy promotes upward social convergence among EU countries. It is well-managed, well monitored and supports quality projects. In other words, cohesion policy works and delivers results.

Cohesion policy reflects solidarity between the member states and European regions – the founding principle of European integration.

Cohesion policy investments have become trademarks of the EU at local and regional levels. No other instrument has a clearer link with citizens and the local economy. People are connected to water, broadband and transport infrastructures thanks to cohesion policy. They receive a better education at schools, better healthcare at the hospitals, and receive better training.

They work, start their own company and innovate thanks to cohesion policy. The discussion on the future Multiannual Financial Framework has already started.

Cohesion policy must be at the centre of this debate. Our best investment policy must remain ambitious beyond 2020. The MEP from Romania, Mrs Clodite Armand, showed the inconvenient truth, that by giving away money Western Europe gives it to itself. But CEE countries will remain happy with that as long as we keep this scheme in place.

Head of the Polish Economic Institute

Eastern European Futures

In 2009, the European Union and six of its Eastern neighbours launched the Eastern Partnership (EaP) with the stated aim of building a common area of shared democracy, prosperity, stability and increased cooperation. A decade on, however, progress has been mixed.

Visegrad Insight is published by the Res Publica Foundation. This special edition has been prepared in cooperation with the German Marshall Fund of the United States and supported by the International Visegrad Fund.

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