The European Union's cohesion policy risks a major reduction of funds under the next Multiannual Financial Framework, despite its palpable effects on economic growth and competitiveness. Net contributors should not forget how much they owe themselves to cohesion funds.

The idea behind cohesion policy dates back to post-war attempts at boosting growth in Europe. Today, we are faced with a similar situation due to the eurozone’s sluggish performance, a lack of optimism about the economy and a possible recession.

Cohesion policy should be treated as a crucial stimulus for the economy. If not, we might cut off the nose to spite the face. Western countries all too often treat cohesion policy as a charity cause and too rarely as a business opportunity, which it actually is.

Gutting the Marshall Plan

Looking back, the first manifestation of cohesion policy is the Marshall Plan, which was US post-war assistance to Europe to boost the economy and improve the quality of life for Europeans. More than half a century has passed since then.

George C. Marshall

The European Union’s cohesion policy focuses on the economic dimension with some welfare addons. Overall, as with the Marshall Plan, it creates demand in the East for services and products from the West. Austrian, German and Scandinavian companies built Polish, Czech and Slovakian roads. As did Americans in Western Europe.

While completing its mission, the European Commission (EC) has proposed five goals for its cohesion policy after 2020, but no comprehensive strategy has been developed. The EC foresees only general goals and at the same time plans severe cuts. The final decisions are to be made under the supervision of President-elect of the European Commission Ursula von der Leyen.

The outgoing European Commission has proposed reducing cohesion policy’s funding by about 10 per cent for the 2021-2027 budget, which translates to a budget of 330 billion euros. These estimates for spending on economic, social and territorial cohesion not only seem erroneous, but it is not entirely clear what they result from.

In a situation of impending economic slowdown and increasing doubts regarding the principle of solidarity in the EU, of which the most spectacular example is Brexit, responsibility and focus on improving the well-being of Europeans should go hand in hand.

If the EC’s proposal is maintained, in the next seven years Central and East Europe will receive less to invest, which also means lowering the public investment driving consumption of goods and services coming from Western Europe.

The South, which has received the greatest support per capita to this day, would get even more in the next Multiannual Financial Framework than it does today.

The chances for the negotiations to be completed and for a consensus to be reached by the end of the year are small as Europe seems to be divided more than ever since 2004.

Growth policy

Cohesion policy is a policy of growth, not redistribution. If the leading tool for stimulating competitiveness and sustainable prosperity becomes a social program to save selected economies after 2020, the crisis of solidarity in the EU will certainly get worse.

A bad budget relocation will hit the entire Union. Especially since there is already a slowdown on the horizon.

For supporters of maintaining the key principle of solidarity in the EU, which manifests itself most fully in cohesion policy, the circumstances seem extremely unfavourable.

The impending withdrawal of the United Kingdom, the second net payer to the EU’s coffers, and increasing global challenges make it a question of where to get the money to, at least, maintain a similar level of funding. The answer is trivial: from taxes. And it is not at all about raising them.

Billions of revenues would be guaranteed by reducing the VAT and CIT gap or limiting gigantic outflows to tax havens. Of the two million EU tenders tested worth over one trillion euros in the years 2006–2018, as much as 55.6 billion euros were provided by companies located in tax havens.

Trade protectionism applied by member states is leading the EU economy to losses of 180 billion euros a year.

All the Union’s citizens, including beneficiaries of cohesion funds, are losing due to these systemic imperfections. Ensuring truly free trade in the single market (which has been unsuccessful since the late 1980s) does not only bring huge budget revenues but also less tension and problems faced by entrepreneurs daily.

These and other sources of additional revenues could be pursued if we give cohesion the importance it deserves and we treat it as an investment tool.

There are no net payers

Net contributors often forget how much they owe themselves to cohesion funds. They often are mistaken for compensation because of budget contributions or a kind of social aid for those in need. And net contributors are doing pretty well on cohesion policy. Across the EU, every euro invested in cohesion policy in 2007–13 generated nearly 2.75 euros of GDP and brought back almost one euro of trade to the richer countries.

Just with creation of additional trade 80 per cent of those funds have returned to the countries that transferred them and in some countries, the benefits were astonishingly high e.g. for Austria (331 per cent), Germany (150 per cent), the Netherlands (145 per cent) or Belgium (114 per cent).

Portugal, Greece and the CEE countries benefit the most from it in terms of per capita revenue. The budget for cohesion policy amounted to 787.96 billion euros in 1989-2013. Money spent in the framework from 2007-2013 will contribute 1 billion euros to EU GDP by 2023.

Each euro spent has a catalyst effect in the economy creating additional public investments, trade and consumption and old EU countries benefit.

Economic development in countries like Poland or Slovakia is one-twentieth higher due to the spending of EU funds. But the divide between net payers and receivers is false. This resembles more the situation of FDI, which in many ways gives additional profits to the investing country.

New Commissions job

Ursula von der Leyen

The main challenges facing the new EC, headed by President Ursula von der Leyen, are to fix the rules for granting funds, create a system of reliable assessment of the effectiveness of actions, develop a bold strategy of the cohesion fund and increase the efficiency of obtaining funds. These goals are achievable. We can fix the tax loopholes, and we can create a result-oriented system and means of evaluation.

Furthermore, Poland is ready to contribute more to the EU budget to maintain the current role of cohesion policy and ensure that this money funds key EU priorities such as internal security, migration, investment in improving the climate and industrial innovation as well as a just transition for coal regions and modernisation of energetic infrastructure.

There is an optimistic scenario described by Visegrad Insight and GMF in their European #Futures. Scenarios for cohesive growth, where the European Union manages to spur innovation, which in some areas is possible. This is the next step in the Multiannual Financial Framework – to boost innovation in the EU.

There is also a grieving scenario described by experts for the European Commission in 2012 as “no one cares”, when the European project step by step collapses, first with the exit of one of the member states and then because of European capitals squabbling over non-existent issues instead of those that help them to create a common language.

However, today when asked about the main assets of the EU more than a quarter of Europeans mention the good relationship between the EU’s member states, or the economic, industrial and trading power of the EU. More than one in five mentions the standard of living of EU citizens. Let us focus on doing that from the waters of the Atlantic Ocean in the West to the Bug River in the East and from the ice caps of the Arctic Circle to the warmth of the Mediterranean Sea. Let us do business and not charity.

Head of the Polish Economic Institute


Scenarios for cohesive growth

As of 2019 the negotiations about the next Multiannual Financial Framework (MFF) will enter a critical moment. In the face of an imminent Brexit and the fallout from global turmoil, the EU has to reflect on its guiding principles and take decisions to fulfil the promise of a united Europe.

Download the report in PDF

The Visegrad/Insight is the main platform of debate and analysis on Central Europe. This report has been developed in cooperation with the Centre for European Policy Studies (CEPS).

Launched on 1 October 2019 at the European #Futures Forum in Brussels.