(Bloomberg) -- The European Union’s €392 billion tool to smooth out differences between the poorer and wealthier regions of the 27-member bloc need an overhaul, according to a ZEW report.
The so-called cohesion funds — one of the biggest mainstays in the EU’s finances that make up nearly a third of the 2021-2027 budget — were discussed this week, with German Finance Minister Christian Lindner introducing the study in Brussels. The ensuing discussion suggests that the upcoming negotiations on the 2028-2034 EU budget will be heated.
In 14 chapters, the report points to an “inefficient” use of the cohesion funds and a failure to achieve the objective of reducing inequalities. Amid the rise of other geopolitical and economic challenges, like the war in Ukraine and the need for decarbonization, the authors argue that the outlays clash with “more urgent alternative spending needs.”
High skilled and higher income households benefit more in terms of jobs and income, therefore widening inequalities within regions, the study finds. As subsidies also go to richer regions, authors argue that the current policy lacks focus.
Other chapters point to only moderate short-run effects on reducing regional disparities and decreasing marginal effects. An explanation for the lack of effectiveness is the divergent ability to absorb funds which hinges upon administrative capacity, especially regarding the availability of human capital and the robustness of institutions.
The report’s findings highlight that the European funds crowd out public investments of nation states — violating the EU’s so-called additionality principle — but succeed in attracting private money. The lack of impartial and comparable evaluation of the funds’ usage is also criticized.
At Monday’s presentation of the report, Lindner called the cohesion policy “overfunded” and drew attention to the fact that only 5% of the available money in the the 2021-2027 budget have been accessed. Speaking at the same event, outgoing EU Commissioner for Cohesion and Reforms Elisa Ferreira countered that given competition from China and the US, the full potential of all EU regions is needed, pledging to continue funding cohesion policy.
Economist Lars Feld, who advises Lindner on fiscal policy, contributed a chapter to the report, which is overall dominated by authors who are male and German. Several of them also share the finance ministry’s hawkish stance.
Asked about the ZEW study, Hungarian Finance Minister Mihaly Varga said that the topic of cohesion policy will be a priority for the Hungarian presidency.
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