The rich get richer and the poor stay poor under unfair system

Date: 03/03/05

The reason why there are imbalances between different member states as to what they receive from the EU purse is that the Union's spending is lop-sided. Any effective method of resolving the imbalances must deal with the way spending is decided. While on the revenue side, the contributions of member states reflect the size of their economies and, therefore, their prosperity, 80% of EU spending goes on just two items: farming and structural funds.

On structural funds, the European Commission proposed in February 2004 that spending be concentrated on the most needy regions and that the designation of regions outside the underdeveloped or 'Objective 1' regions eligible for funding should be partially eliminated. Objective 1 regions are those with income per person less than 75% of the EU average.

The avowed aim of these proposals has been to link Community funding more closely with the relative prosperity of the beneficiary region. But in the name of realpolitik the Commission also proposed grandfathering the eligibility of certain regions, leading to perverse results. Consider the examples of Ireland and Cyprus. The western region of Ireland has an income per person at 96% of EU average. But on the basis of the statistics that were drawn from the 1997-99 period, it is currently classified as an Objective 1 region and is eligible throughout the 2000-06 period to receive both EU assistance and state aid at the highest allowable rates. Because of its current status as Objective 1 regions and despite its high income per person, western Ireland will continue in 2007-13 to receive EU assistance and state aid under transitional arrangements. By contrast, Cyprus currently only has 'Objective 2' status. Because its income per person at 86% of EU average is above the 75% threshold, it will not qualify for any transitional arrangements, nor will it be able to grant state aid at the higher permissible rates.

Entitlement to agricultural spending is automatic but structural spending is not. So member states will bargain hard for their share of the €336 billion that has been earmarked for structural fund the 2007-13 period. The Commission has proposed that 80% of that amount should go to Objective 1 regions. Although the 75% threshold is "objective", neither the total amount allocated to them, nor the transitional arrangements that perpetuate the eligibility of certain regions is objective. The end result is uneven treatment of member states.

Structural funds require a more radical reform that can deal with anomalies in the receipts of the member states. One solution is to adopt on the expenditure side of the budget the same system as on the revenue side.

On the revenue side, it is accepted that member states should contribute according to their wealth. Correspondingly, it makes sense to allocate structural funding to member states according to their need. In the context of structural policies, this need is the ability of member states to provide financial resources for the growth of their poor regions. The EU should support those member states which do not have that ability. For example, there is no justification to make available regional funding to Belgium, Sweden or the UK, all three of which have an income per person at about 117% of the EU average.

In the interest of solidarity, the EU should continue to provide funding for regional development but the principle should be that the EU should support poor regions in poor countries. Rich member states with poor regions can mobilise domestic resources for the development of their underdeveloped regions.

The consequence of adopting such a principle is that regional mapping outside Objective 1 regions should not be eliminated. All member states have some regions that are less prosperous than others. Since some of them may cease to be eligible for EU funding, the only remaining source of regional financing will be in the form of state aid granted by national authorities. In order to prevent subsidy wars, this aid like all state aid needs to be modulated by EC rules, but it should not be made impossible.

But recent Commission discussion papers on reform of regional state aid do exactly that. No regional aid outside Objective 1 or transitional regions will be allowed. Despite their claims to bring about coherence between structural funds and state aid, these proposals perpetuate the unfairness against regions in member states that have a moderate income by EU standards.

A reformed system of structural policies that is more closely linked to actual levels of prosperity would stop fixing eligibility for structural funding over the whole seven-year financial perspective just on the basis of relative income at the beginning of the period. It would vary the annual receipts of member states according to the actual level of their income in relation to the EU average. Although there will be more annual variability, there will also be closer correspondence between EU expenditure and need.

In such a budgetary system, countries with income below the EU average will have a budgetary surplus in structural policies and countries with income above the EU average will have a budgetary deficit. The system will be much fairer, more transparent and less susceptible to late-night haggling.

• Phedon Nicolaides is a professor at the European Institute of Public Administration, Maastricht.

The author, who is professor at the European Institute of Public Administration, Maastricht, says that while on the revenue side, the contributions of Member States reflect the size of their economies and, therefore, their prosperity, 80% of EU spending goes on just two items: farming and structural funds. He makes suggestions on how to reform these spending regimes to be based more on actual levels of prosperity in the Member States.