A host of eastern European countries would see their annual EU funding fall by 1 per cent of gross domestic product under Brussels’ proposed budget reforms for the seven years from 2021.
The cuts could end up being larger still if the European Commission redeploys a chunk of its planned €1.25tn of funding away from eastern Europe towards its southern periphery.
With eastern Europe’s contributions to the EU budget likely to rise — reflecting an increase in the overall budget, the fact that income levels in the former communist states have significantly converged with those in western Europe and the loss of the UK, a major budget contributor — inflows are likely to decline still further in net terms.
“We think that annual structural fund inflows for each of the central and eastern European economies could be 1 per cent of GDP lower than at present,” said Liam Carson, emerging European economist at Capital Economics, a shortfall equivalent to more than $6bn a year in the case of Poland alone.
Mai Doan, central and eastern European economist at Bank of America Merrill Lynch, said “less EU financing undoubtedly bodes ill for growth” given that the impact of the EU’s largesse to date has been “significant”.
Regional “cohesion” funding allocated during the 2007-13 spending round raised GDP in Poland, Hungary, the Czech Republic and Slovakia by 4-5 per cent, according to the commission’s own evaluation in 2015, Ms Doan noted.
The Polish government has estimated that EU funds raised the country’s annual GDP growth by 11 per cent between 2004 and 2016, suggesting that any diminution in handouts could prove costly.
Brussels’ blueprint, unveiled last week and which will now doubtless be the subject of intense haggling, proposed cutting its spending on cohesion funds, used to help the poorest parts of Europe catch up with richer countries, as well as agricultural subsidies, by about 5 per cent.
While these cuts might sound relatively modest, the impact on the countries that have been the prime beneficiaries of cohesion funding since their accession to the EU between 2004 and 2007 could be far more profound.
The EU’s own multi-annual financial framework document suggests that once inflation is taken into account, cohesion funding will fall by 11 per cent between 2014-20 and 2021-27, and agricultural subsidies by 17.7 per cent.
Factoring in these proposed cuts, analysts at Citi Research estimate that Bulgaria will lose annual funding equivalent to 0.7 per cent of its GDP, ahead of Hungary at 0.6 per cent, Poland and Romania 0.5 per cent, Slovakia 0.4 per cent, the Czech Republic 0.3 per cent and Slovenia 0.2 per cent.
Analysis by Mr Carson at Capital Economics suggested these shortfalls could be larger still.
Factoring in the assumption that eastern European countries will continue to see economic growth in the coming decade, their funding/GDP ratios for the 2021-27 period will be lower still, if the current budget proposals come into force.
Mr Carson estimated that Slovakia would be worst hit, with its annual allocation falling 1.12 percentage points to 1.51 per cent of GDP, from 2.63 per cent in the current 2014-20 window.
Poland, Hungary and the Czech Republic would all see cuts of virtually one point of GDP, with Romania and Bulgaria losing between 0.8 and 0.9 points.
Mr Carson feared the biggest impact could be on the region’s public finances, with governments forced to pick up the tab from Brussels to fund ongoing projects.
Moreover, these estimates do no take into account a further set of factors that could magnify the impact of the commission’s budget overhaul.
First, the main determinant of the allocation of regional cohesion funds has thus far been per capita income, which has driven 86 per cent of the weighting. Brussels is now proposing to dilute this factor to incorporate additional measures, such as unemployment levels and a willingness to take a share of the migrants entering the EU.
This change of emphasis would see a proportion of the already shrunken cohesion funding reallocated from eastern Europe, where many countries have low jobless levels and a reluctance to take in migrants, to the continent’s unemployment-racked southern periphery.
Second, the commission is proposing introducing a “rule of law” criteria to tie payments to a country’s respect for EU values, seen as aimed at the “awkward squad” of Poland and Hungary, which have fallen out with Brussels on a range of issues.
If enacted, this could potentially squeeze funding to these countries still further. However, this might seem an unlikely eventuality given that the introduction of such a clause would need to be unanimously agreed by all member states.
A third factor, however, is the strong growth of most eastern European countries in recent years, which has allowed them to close the income gap with their peers to the west.
According to Eszter Gargyan, an economist at Citi Research, since accession to the EU in 2004, income per head in the Czech Republic, measured in purchasing price parity terms, has risen from 78 per cent of the EU average to 88 per cent. Some countries have seen larger rises still, with Slovakia going from 57 per cent to 77 per cent and Poland from 50 per cent to 68 per cent.
This means that, even if cohesion funding was neither being cut nor redirected towards the Mediterranean for political reasons, eastern states would still be likely to see their allocation fall as money is reallocated to the likes of Greece and Portugal.
Likewise, the fact that eastern countries’ share of the EU’s total GDP has risen is also likely to mean that their share of budget contributions will rise, particularly with the UK no longer paying into the coffers.
“The net inflow to these countries will fall more significantly than [Citi’s] numbers suggest,” said Ms Gargyan, even if the precise impact is unknowable at this stage.
Mr Carson, though, offered a crumb of comfort. He noted that recipients of cohesion funding often struggle to spend all the money they are allocated, due to the difficulty in finding projects that meet Brussels’ criteria.
As such, if eastern European countries can achieve high “absorption” at the start of the 2021-27 spending window, the year-on-year decline in actual EU spending may not be as great as the headline figures suggest.
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