Economic Policy Review ISSN 1313 - 0544

A Perspective over the EU Funds

Author: Adriana Mladenova / 29.05.2007
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The threat of not being able to master the money from the EU Structural and Cohesion Funds and from the agricultural subsidies is one of the widespread and extensively discussed topics in the public space. Although our country joined the EU on 1 January 2007, the programs of the EU Funds, as well as the application process, have not started functioning yet. But in the first two months the state made its mandatory contribution to the EU budget to the amount of 146,6 million leva. According to the treaty obligations with the EU, Bulgaria should contribute to the budget of the Union 1,2% of its annual GDP, as the amount for 2007 is expected to exceed 640 million leva. In exchange for these payments the state receives a share of the EU budget in the form of subsidies and gratuitous relief funds. The subsidies and relief funds amount to the large sum of 4,6 billion leva for 2007-2009 period, which is allocated in the following spheres:

  • 1) Agriculture- 1,5 billion euro
  • 2) Policies of restructuring (building of infrastructure, competition between firms, and regional development)- 2,3 billion euro
  • 3) Domestic policies, improvement of the administration, and budget compensations- 730 million euro

Assimilation of the EU Funds from the new member-states

The Ministry of Finance has published data on the financial implementation of the pre-accession programs in Bulgaria toward the end of March 2007. The data might be an original indication for the future assimilation of the instruments of the structural funds and financial resources, provided for the implementation of CAP (Common Agricultural Policy), although these funds, only for 3 years, represent more than two times the budget of the pre-accession programs.

The data shows that the implementation of SAPARD program (which finances the agriculture and food, wine, and tobacco industries) is 95%, while the implementation of FAR program is 64% and of ISPA program (which finances infrastructural projects on the national level) is 43%. As ISPA has the biggest share in the aggregate amount of the resources provided from the pre-accession programs, the assimilation in the beginning of 2007 represents on the average around 60% of the total amount of the funds. The situation in Romania is similar. The implementation of SAPARD program is over 95%, and of ISPA program is around 35%. This indicates that in these two countries there is a lack of willingness for managing big infrastructural projects, as this reluctance is often prompted by political reasons or insufficient financial and management capacity of the local authorities to implement infrastructural projects.

The leader in the assimilation of the EU funds from 8 of the newly-accepted EU member-states is Slovenia, which in October 2006 agreed upon 43% of the budget, provided for subsidies and relief funds for the period. The second place is taken by Estonia with 39%, followed by Hungary-31% of the resources provided by the agreement. The last places of the "assimilation contest" are taken by the Czech Republic, Slovakia, and Poland which have agreed upon around 15% of the common budget of the EU funds, provided by the financial agreements of these countries with the EU. It is evident that in all the above-mentioned member-states the assimilation process of the funds in the beginning of their membership is relatively low.

As a whole, the net effect from the EU membership over the budget is negative, due to the duty of co-financing the projects of the EU funds from the state budgets, the advanced financing of the approved projects, the countries' contributions to the EU, and the costs of sustaining a larger administration as a result of administering the subsidies and transfers.

Some of the widespread myths about the EU funds are the following:

  • 1) The EU Funds must be 100% assimilated.

Bulgaria is the country for which the biggest amount of subsidies and relief funds from the Structural and Cohesion Funds as a percent of GDP has been agreed upon. The fear that the country would not be able to take a full advantage of this "privilege" and to assimilate all money is one of the leading criticisms against both the politicians and the business circles in the country. However, in reality the assimilation of funds depends not only on the administrative capacity, but also on the macroeconomic capacity of the country to undertake specific projects in exchange for the provided money. The distribution of funds in different sectors depends on the re-assigned, centrally prepared tasks and priorities. The real needs of the economy may be differentiated from the guaranteed spheres of financing. The desire to assimilate all resources at any cost in this case will lead to big distortions in the economy, changes in the relative prices of goods and services, pro-inflation pressures, and to implementation of projects which later on appear to be unprofitable.

The interventions distort the behavior of the entrepreneurs. Instead of striving for increasing their output, some firms will make more profits if they design projects with which to apply for EU funding. However, the logic of the market is exactly the opposite- an entrepreneur conceives a business idea and then he looks for ways to finance it. The market functions on the principle of natural selection and these projects, which possess the biggest potential to become profitable, are financed. The investment of own resources is an incentive for entrepreneurs and investors in order to correctly evaluate projects and to aim at making a minimal number of mistakes in their evaluations. This is not applicable to officials who operate with somebody else's, not their own, money.

  • 2) The control in the EU over the spending of the resources from the EU Funds is more reliable and the misappropriations are less.

The mechanism of distributing the subsidies and relief funds is related to large transaction costs over the construction of clumsy administrative structures. The aggregate amount of resources from the EU funds, which should be distributed among the 27 EU member-states in 2007, adds up to approximately 100 billion euro. Everywhere in the world the concentration of excessive power and discretion in the hands of public organs creates pre-conditions for the formation of corruption, rent-seeking, and lobbying for the interests of certain groups. Scandals and disclosures of abuses of EU funds are an inseparable part of the EU existence and are not characteristic only of Bulgaria and Romania, or the Eastern European countries as a whole, but also of countries of "Old Europe" like Greece and Italy. It is indicative that already 12 years in a row the European Chamber of Accounts does not certify the EU budget due to omissions and suspicions of abuses, and of "mistakes in the legality and regularity" of reporting the common funds.

  • 3) The poor regions may achieve more substantial economic growth through receiving money, without making any effort.

The prosperity and long-term economic growth may only be a result of the rise in the labor productivity and the increase of investment and capital in the economy, but not a result of the artificial increase of money aggregation in the economy. Some studies have appeared that prove that the attraction of technological innovations in regions with untrained labor force, insufficient resources, and inappropriate conditions for the development of high-technological business may lead to more costs for people than potential benefits.

On the other hand, subsidies create a culture of dependence and do not stimulate the innovations and the enterprising spirit of the market players. For example, subsidies are the reason for making short-sighted decisions and sustaining unprofitable and losing productions. The Community policy in the sphere of banana production stimulates the European producers in France and Spain to raise the output, although their costs are times higher than the costs of Latin American producers. In the long run, without relying on the EU officials for their support, the producers will go bankrupt.

The conclusion is that the EU funds will not solve the country's inherent problems related to low incomes and unsatisfactory quality of services in some public spheres like the education and healthcare spheres. In order to improve the well-being of people, real economic reforms and maintaining of favorable institutional and political environment are necessary tools.