EU aid alone will not be enough for applicants to close the wealth gap

Date: 27/01/2000

By Simon Taylor

STRUCTURAL fund spending may have helped the EU's once poor relations - Spain, Portugal, Ireland and possibly Greece - to become rich enough to join the élite euro club in a relatively short time.

But even though the Union is providing €3billion a year to prepare the ten central and east European candidates for membership, they face a longer struggle to close the wealth gap on the EU's existing 15 members.

Even the richest of the frontrunners, Slovenia and the Czech Republic, lag behind the poorest member states. In terms of national income per capita, Lubljana and Prague - widely seen as the tigers of the borscht-belt economies - are still below Greece, at 68% and 63% of EU average income. Romania, the straggler of the second wave, weighs in at a lowly 23%.

EU governments have not made applicant countries any glib promises that Union aid will quickly raise their incomes to the level of west European states, which are some of the richest in the world. Instead they have been told that prosperity will flow from tough economic reforms and attracting the foreign investment needed to modernise the countries' industrial heartlands.

It is nevertheless clear that the former Soviet bloc countries have massive financial needs in key sectors if they are ever to form a functioning part of the EU's single market and take on the administrative burden of Union membership.

In Berlin last March, EU leaders agreed an enormous financial aid package which would address, although not fully cover, the applicant countries' most pressing needs. Over the next seven years, the Union will provide €3.1 billion a year to help candidate states prepare for membership.

This 'pre-accession aid' is divided into three different programmes and is intended to close gaps in environmental standards and transport infrastructure and to strengthen the civil service to administer the EU's complex policies.

While the Phare programme is the biggest of the three, with an annual budget of €1.56 billion, only 30% of this goes on institution-building projects.

The 'pre-accession structural instrument', or ISPA as it is dubbed under its French acronym, offers the next largest slice of financial aid. This money is intended to help the applicant countries bring their environmental standards up to EU levels, which will be a major challenge in all candidate countries, not just those with an obvious historical legacy of heavy industry and its inevitable polluting effects. Meeting the Union's very tough criteria for drinking water and air quality will require major investments in installations such as water treatment plants and sewage works.

ISPA's other key goal is to ease transport bottlenecks by upgrading key road and rail networks. But this will also cost far larger sums of money than the Union is planning to provide. One individual rail project linking Polish cities of Gdansk and Katowice has a price tag of €5 billion, while the total ISPA budget is only just over h1 billion a year, shared among ten countries.

The rest of the costs will have to be met by public investment from the applicant countries' national coffers and whatever private-sector money can be attracted into income-producing schemes.

To help countries adjust to the EU's Common Agricultural Policy and its increasingly important rural development chapter, the SAPARD fund provides another €520 million a year.

But when the first candidates join the Union, they will potentially have access to a pot of structural fund money which could rise to €12 billion by 2006.

At present rates, all regions in the candidate countries would qualify for structural fund spending because their per capita income levels are below the ceiling of 75% of the EU average. But Commission officials point out that economic growth rates in the best-performing candidates like Slovenia and Hungary could see them catch up with their western neighbours and make at least some of their regions ineligible for funding.

They will then have to face the same problems as existing member states: uneven development in their own country. But it will often be more acute as regions bordering the west enjoy the highest levels of trade and investment while the eastern flank lags severely behind.