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The billions spent by the EU on regional development subsidies have a mixed record when it comes to providing jobs and growth. Wealthier member states can afford to run their own regional policies instead of recycling money between themselves via the EU budget.
The structural funds can have a positive impact in individual cases if combined with good public administration and pro-growth policies, as the example of Ireland in the 1990s shows. However, there is no conclusive evidence that the funds in the EU’s regional policy have had an overall positive economic effect on Europe’s economy. There are still a number of problems with the funds, including an unsatisfactory correlation between funding and results.
Most fundamentally, involving all member states in EU regional spending, irrespective of their relative wealth, is economically irrational. As the Commission itself has admitted, this exercise creates “considerable administrative and opportunity costs.” Firstly, it can channel funds away from where they can have the most comparative impact, as richer member states already attract investment, which, at worst, can be crowded out. Secondly, in richer member states, the structural funds mostly serve to redistribute income within the same regions.
Over the 2007-2013 EU budgetary period, the UK is contributing roughly £29.5bn to the EU’s structural and cohesion funds, and getting back around £8.7bn, making it the third largest net loser from the funds, after France and Germany.
We estimate that of the UK’s overall contribution, 70% goes to other member states, only 5% is redistributed across regions, with the remaining 25% being redistributed within the same region in which the funds were raised. This begs the question what the added economic value of the structural funds is for Britain.
Of the 37 regions in Britain under the EU’s classification system, 35 are net contributors to the structural funds, with only West Wales and Cornwall net beneficiaries. This means that some relatively poor areas lose out substantially. For example, we estimate that the West Midlands, which has the lowest disposable income per capita in the UK, pays £3.55 to the structural funds for every £1 it gets back. Merseyside, which has a disposable income of 88% of the UK average, pays in £2.88 for every £1 it gets back. All the regions in Scotland, the North East pay in more than they get back, as does Northern Ireland.
In 2003, the then UK Chancellor, Gordon Brown, said that the time was ripe to “bring regional policy back to Britain.” However, the Coalition has dropped the previous Labour Government’s commitment to devolve regional spending back to the UK and to focus EU structural funds exclusively on the less developed EU member states.
As proposed by the previous Labour Government, limiting the funds to EU member states with income levels at 90% or below the EU average could create a win-win situation. Such a move would instantly make the funds easier to manage and tailor around the needs of the poorest regions in the EU. We estimate that 22 or 23 out of 27 member states would also either pay less or get more out of the EU budget, as the funds would no longer be transferred between richer member states. This option could therefore attract strong political support in many capitals.
If this policy had been adopted for the present EU budgetary period (2007-2013), France would have emerged as the biggest winner from focussing the funds on the poorer states, cutting up to €12.8bn from its net contribution to the EU budget over seven years. The UK comes second, saving up to €5.1bn (£4.2bn) over seven years. Importantly, all new member states except for Cyprus (and Slovenia under one possible scenario) would also save money on their contributions to the EU budget, with Poland gaining the most.
Italy, Spain and Greece would all lose out substantially, but they are already set to get a smaller share of EU subsidies as recent enlargements continue to erode their net receipts. More importantly, to cope with the eurozone crisis, these countries need far more responsive and better-targeted support than is currently being offered by the structural funds.
Devolving regional policy should involve the Coalition promising to ring-fence the £8.7bn that it currently receives via the EU’s structural funds for continued regional and regeneration spending around Britain. In addition, it could pledge to re-invest its projected saving of up to £4.2bn under the 90% threshold back into regional development. This would mean that virtually all UK regions would experience a rise in the amount of subsidies they receive. However, the UK must also ensure that it replaces the structural funds with something that works radically better with a focus on results, rather than getting the money out of the door, as is often the case at present.
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