Economist: EU’s next budget asks for sacrifices

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The EU's budget for the 2014-2020 period will have to change the way regional funds work, says Fabian Zuleeg of the European Policy Centre. The money that traditionally goes to poorer countries should be redirected for the time being to where it is really needed – the countries deeply hit by the economic crisis – keeping in mind the single goal of protecting the EU as a whole, he told EURACTIV in an interview.

Fabian Zuleeg is chief economist for the Brussels-based think tank the European Policy Centre. He has been closely involved in the talks on the EU's 2014-2020 budget and has published analyses on the EU's monetary policy, regional funds and the overall budget. He answered questions put by EURACTIV's Ana-Maria Tolbaru.

What role do cohesion funds play in the EU’s 2014-2020 financial framework?

There are ongoing discussions around the next Multi-Annual Financial Framework [MFF] and as you would expect, the future of cohesion policy is a big part of those discussions. One of the big questions in relation to that is if the focus of cohesion policy should change.

The big question for this debate was how far the cohesion policy can help to counteract the negative impacts of the crisis – particularly social impact of the austerity measures which are being implemented across Europe.

Do you see a change in the way people look at regional funds now? Because I would make a reference to what [German Chancellor Angela] Merkel said at the last EU summit, that rich members and net contributors are finally saying “spend as much money as much as you can, implement it in different operational programmes; they’re not going back to the national budgets”.

There is a change in the mood and attitude, which I think is a result of, in essence, the recognition that this crisis is a fundamental crisis and at European level we should do everything we can and use every instrument we can to address the impact of this crisis.

How this will be reflected by the actual proposals, that is where I have a problem, because I think the proposals we have are very good proposals for a pre-crisis period. I don’t think they take enough account of the changes the crisis has brought.

Particularly, they haven’t taken enough account of the euro crisis. I think the Europe 2020 strategy and everything associated with it is addressing a different crisis. A low-growth crisis.

We have a big problem – that is, it is not the lowest income countries that are in deepest trouble. The deepest trouble has hit as a middle income crisis within the euro system. Spain, Italy, Ireland – these are not countries that fall into the low-income category.

But we have funds which are targeted almost exclusively according to income. We have a whole system which is set up to address long-term structural problems. I don’t think we are doing enough to address the immediate and difficult environment which the crisis has created.

Why make the funds more flexible for member states that haven’t used the money?

The programmes have been very rigid and it is difficult to change anything about the programs, because if the member states didn’t access the money in a particular way, this money would then go back in essence to the richer member states, the net contributors.

It is not novelty that during this crisis we have admitted that this is a problem and have offered a number of different routes for countries to access EU funds. What is new is that this suggests there will be more flexibility in reusing the money that can be recycled. If that can be implemented I think it is a significant change because it does change the way the funds work.

Do you think that funds should be oriented more towards the states that need them right now like Greece Ireland or Spain?

I think we have to focus far more on the crisis countries than we are doing at the moment. That doesn’t mean that we should not be focusing on the new member states.

Because there is a different problem there, but it’s still a very important problem. I think the solution is not taking the money from the new member states – even though I think there are certain cases where the EU can reduce the amount of money, given that there has been a significant improvement in Central and Eastern Europe – but the key issue is if the money doesn’t come from new member states, then, unless you enlarge the budget as whole – which is very unlikely – then, there are only two other sources it could come from.

One is the money which is spent on the poorer regions in richer member states – to leave that responsibility on the member states rather than control it at EU level. The other option is agriculture. That’s the other big pot which could be refocused.

However, it is politically difficult at EU level to touch agriculture. There is a good reason why we look at it. In terms of combating the crisis, in terms of delivering EU public goods and all the things we should try to do with the budget, the agricultural budget is weak.

The agriculture budget has been shrinking and shrinking every year – is that a trend that comes to say agriculture is not as important for member states as before?

In my view, it should be part of the long-term reform of the EU budget. I don’t think we should be spending that much of our common resources on agriculture.

It is very dangerous to pick out a particular sector and support it. You could make a similar argument on coal mining or about a number of different sectors, but this is not how we run our economies. We don’t favour particular sectors – because you end up subsidising without end.

We should have changed this a long time ago. It’s politically very difficult, but economically it doesn’t make sense.

The Common Agricultural Policy was introduced at a different time, with different challenges. We are talking about a world that had gone through war, famine and hunger; where shortages were still a part of everyday life. So there was a good reason for the CAP. But the world changes and we are now more than 65 years later – maybe the same arguments don’t apply anymore.  I think the CAP has to change with the times and I don’t see that we should have a permanent and eternal special status for a particular sector.

With a two-speed Europe shaping up, this argument might flare up debate because the poorer countries already think they’re being left out.

There is a political difficulty without a question, but the reality and the crisis has shown this very clearly – we have a very interdependent economy. What happens in the eurozone is without a shadow of doubt going to affect every member state of the Union. My view is that if that if it goes wrong it is going to have a horrendous cost for everyone.

How big is the urgency?

It’s very urgent. We run the risk that things could go catastrophically wrong. That doesn’t necessarily mean that it will go wrong tomorrow or within the next month, but the risk is there.

In the past two years, how much has the risk increased?

It has increased tremendously, because we were in a situation, when the crisis started, where only Greece had troubles and at that time the crisis could have be contained by focusing on simply on Greece.

Now we cannot do it without solving the problem of the economic monetary union as a whole, so the risk is very high. I think at the moment my prediction is still that the euro will manage to be integrated further, to address the construction mistakes that were in the European monetary union.

But that is not a foregone conclusion. We should never forget that when things happen in the markets, they can happen very quickly. People should remember what happened with the exchange rate mechanism in the early '90s. We had a situation where the British pound dropped out of the exchange rate mechanism in a day.

The point is if policy does not respond adequately in that situation then it can go catastrophically wrong very quickly. We need to do everything we possibly can to signal to the markets, to the populations, to all the actors, that Europe is serious about defending the monetary union and that we are willing to use all the instruments we have at our disposal, including a political union.

Are we doing that already?

We are moving in that direction. I think we have moved more in that direction, I don’t think that fiscal compact is going to be the end of the process but certainly it opens up the possibilities to now talk about what the next steps are going to be.

My view is that the next steps will include some form of collateralisation of debt and if we move in that direction, Germany will not move without further economic and political integration.

In order to move towards that political union and to help direct these regional funds to where they are really needed in order to solve the crisis – do you think some countries have to be ready to make sacrifices?

I think that the way the union works is you sacrifice something for a greater good.

So, yes, it might mean that, in particular parts of the negotiations, countries have to give up receiving a certain amount of money or getting a certain priority, but we shouldn’t lose sight of the bigger picture – a sound and stable economy at European level and that benefits all the countries far more than any particular part of the funding, so we should focus all our attention on that goal and everything else is secondary.

If you take money away from the poor countries, then you have to guarantee it is only a temporary, exceptional measure, surely?

I think it’s not necessarily a question of taking money away from the poor countries. Certain money has to be ring-fenced for those countries which really have income problems.

Some of them have been developing quite healthily, however, and the European money has certainly helped, but it doesn’t mean they have to receive the same amount all the time in the future.

The more you have self-sustainable growth, the less you need the money from the European level, which I think is the way it should be. Ireland was the classic case. It went from a heavy net receiver to virtually getting no money. I’m not saying everything went right but the principle should be as your economy becomes self sustainable, then you need less money from the European part and this money should be refocused on those who need it more.

That means that certain countries in Central and Eastern Europe which are struggling with growth rates and having sustainable economic development would also be part of the focus of this kind of money and wouldn’t be left out.

Do you think the cohesion funds will increase in the next MFF?

What we have now on the table is likely to form the shape of the next MFF. There will still be tweaking, but I think the biggest temptation for member states is not to touch agriculture, but to cut back on those areas that have been increased or newly created – so, in particular the increase in research funding and the Connecting Europe facility. Those two are at risk. They’re highly needed and should be protected but they’re at risk because they’re new or additional so in a negotiation they are often the first thing to get cut.

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