EuroBillions, or how the EU supports the SEE economies

By Valentin Stamov, senior business analyst, SeeNews

“EU funds” is a sacred phrase in Southeast Europe (SEE). Overall, it means “hope for higher living standards”, which is actually the ultimate goal of the EU’s Cohesion Policy. To tackle issues that sometimes lead to the misappropriation of funds the European Commission reformed the schemes for the 2014-2020 period. However, it remains to be seen whether the overhauled Cohesion Policy will indeed lead to an economic and social fairy tale.

EU funds in a nutshell

To make the long story short, the goal of the EU funds is to reduce the gap between the rich and poor countries and regions across Europe. The total budget of the EU funds for the 2007-2013 period was more than 340 billion euro, and for the 2014-2020 period over 351 billion euro will be allocated to boost the European economy. There are two main groups of funds under which the SEE countries can obtain financing. The EU member states in SEE – Bulgaria, Croatia, Romania, and Slovenia, receive funding from the five European Structural and Investment Funds (ESIF), while the non-EU members are included in the Instrument for Pre-accession Assistance (IPA).

How much EU members in SEE got…

In the 2007-2013 period Bulgaria, Croatia, Romania, and Slovenia received a total of 21.2 billion euro under ESIF funds. The leader in terms of absorption of EU funding was Slovenia, which managed to absorb 84% of the total funds allocated to the country.

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…and will get

The EU’s reformed cohesion policy will make available up to 351.8 billion euro to be invested in Europe’s regions, cities and the real economy. It will be the EU’s principal investment tool for delivering on the Europe 2020 goals: creating growth and jobs, tackling climate change and energy dependence, and reducing poverty and social exclusion. The goals will be achieved by focusing the European Regional Development Fund on support for small and medium-sized enterprises with 140 billion euro, or double the 2007-2013 sum.

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What the funds were used for

ESIF boosted the infrastructure development and employment in the SEE EU member states in the 2007-2013 period.

EU investments in Bulgaria were predominantly focused on road and railway infrastructure. The EU and the local authorities failed to allocate investments in job creation and start-ups, although the country had the highest number of European Social Fund participants.

Romania also used a large amount of EU funds to improve its road networks but also managed to raise the employment levels and support startups as well.

Slovenia absorbed the EU funding to improve the water supply and waste water management sectors, as well as expand the broadband coverage of its population.

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Money for SEE EU candidates

IPA is the programme used by the EU to support reforms aimed at meeting EU membership criteria for the EU-aspiring countries – Albania, Bosnia and Herzegovina, Macedonia, Kosovo, Montenegro, Serbia, and Turkey. IPA’s 2007-2013 budget stood at 11.5 billion euro and its successor, IPA II, will provide a total of 11.7 billion euro for the 2014-2020 period. IPA II will focus on better governance, with projects aiming at reforming public administration, using EU assistance more efficiently, adopting and enforcing EU standards, as well as implementing more reforms in the judiciary and fundamental rights and further supporting the fight against organised crime and corruption.

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EU funding pitfalls

Despite the seemingly positive impact of the EU funding, it hides some risks such as occasionally feeding corruption practices, causing environmental damage, and suffering from inadequate distribution of funds.

Other weaknesses of the EU funding schemes, according to a report by UK think-tank Open Europe, include:

  • Conflicting aims – sometimes the structural funds are channeled to areas where the absolute return of capital is the greatest rather than in areas where they can foster the greatest convergence between poorer and richer regions;
  • Opportunity costs – in some cases, the local authorities divert spending from more productive economic projects to unnecessary projects, for example costly and ecologically harmful infrastructure projects, in order not to miss money from EU’s structural funds;
  • Pro-cyclical and unresponsive to changing needs – financing under the EU programmes is negotiated on a seven-year basis, and comes with fixed spending criteria with some discretion to alter spending on a yearly basis. This pushes governments and local authorities to spend the money on co-financing the projects, even if this means running up massive debts, Commissionin order not to forgo the potential opportunities presented by taking up structural funding;
  • No link between performance and spending – the absence of strong conditionality and performance criteria in the allocation of funds meant that some projects continue to receive funding despite the absence of results from the billions in funding that it has received. This also means that the focus is on getting money out of the door rather than spending the cash wisely.

According to the annual report of the European Anti-Fraud Office (OLAF), corruption in EU funding absorption was most widely spread in Romania. The country topped the ranking in terms of investigations into the use of EU funds in 2014. A total of 36 investigations were carried out in Romania, followed by Hungary with 13 and Bulgaria with 11. OLAF received 73 signals from private sources and six signals from public institutions in Romania, while 54 private sources and five public sent signals to OLAF in Bulgaria. In Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, and Slovenia OLAF investigated only one case in 2014.

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Brighter future?

The weaknesses of the EU’s Cohesion policy for 2007-2013 prompted the European Commission to reform the funding programmes in order to further boost the economies of the less developed EU member states and cut corruption practices. The reforms in all ESIF envisage stronger result-orientation, clear and measurable milestones and targets in order to stimulate good projects.