Financial Report 2009: Economic Stabilisation & the EU budget

There has been an ongoing discussion on the role the EU budget should play when it comes to macroeconomic stabilisation. While some scientists call for a much stronger role of EU funds in this respect, arguing that macroeconomic stabilisation should take place on the highest entity level, others point to the fact that the character of EU expenditure is simply not suitable for such purpose as it mainly consists of long term investment (structural funds) and transfers that are backed by legal claims (direct payments).

However, during the financial and economic crisis the EU Commission clearly claimed a role for the EU Budget in balancing the economy, e.g. in the European Economic Recovery Plan (EERP). Also Commissioner Lewandowski yesterday stressed the important role of EU funds in his presentation on the Financial Report 2009. In this respect the Commission is mainly alluding to its 5 billion EUR package agreeed within the EERP, favouring mainly energy infrastructure projects. An amount that is most probably too small to serve a short-term stabilisation purpose.

What is more interesting is to look at the relationship between economic growth and EU expenditure in the member states. If the EU budget served a short-term economic purpose, one should expect that countries mostly hit by the crisis have seen an increase in EU expenditure and vice versa.

The graph shows the change in EU expenditure between 2008 and 2009 and GDP growth in 2009 and 2010. The drastic increase in EU expenditure in the “new” member states is due to increasing absorption of structural funds. We note a drastic increase in EU expenditure in two Baltic countries as well as in Hungary, which were all extraordinarily hit by the crisis. This positive diagnosis is countered by lower increases in Romania and particularly Latvia, two countries which were also severely affected and are even under IMF/EU balance of payments support. What can also be noticed is that countries less hit by the crisis (e.g. Poland and the Czech Republic) see a significant increase in EU spending, too. So the overall picture is rather mixed as one cannot detect a clear cut stabilisation use of EU funding.

Now we take a closer look at the so called “periphal member states” of the Eurozone and note that among those states with the biggest losses of EU funds are Greece, Ireland and Portugal; three countries currently in the focus of international financial markets.

Whereas these losses can easily be explained by the nature of programming of the structural funds (e.g. in 2008 these countries still benefitted from 2000-2006 funds) these findings prove that the EU budget does not systematically play a role in stabilising member states’ economies. Stabilising effects occur, but rather by accident.

However, whether such purpose is desirable in the first place is a question still to be debated.

Ole Funke

About Ole Funke

Ole Funke is a policy analyst at the Federal Foreign Office where he focuses on the EU Budget, the negotiations on the Multiannual Financial Framework as well as on issues relating to European Economic Policy and the ECOFIN council.